Speakers
Kartik Akileswaran, Co-founder, Growth Teams
Mark Lutter, Founder and Executive Director, Charter Cities Institute
Rachel Glennerster, President, CGD
Stefan Dercon, Professor of Economic Policy at Oxford University and former Chief Economist of DFID
Arvind Subramanian, Distinguished Non-Resident Fellow at CGD and former Chief Economic Advisor to the Government of India
Dr Vera Songwe, Chair and Founder, Liquidity and Sustainability Facility, and Non Resident Senior Fellow, Global Economy and Development, Brookings
Hakim Ben Hammouda, Former Minister of Economy and Finance, Tunisia
Lant Pritchett, Associate at Building State Capability at the Harvard Kennedy School and the RISE Research Director at the Blavatnik School of Government, University of Oxford
Eliana Carranza, Global Lead for Labor and Skills, World Bank
Ken Opalo, Associate Professor, Georgetown University Walsh School of Foreign Service
Kunal Sen, Director of UNU-WIDER and Professor, Global Development Institute at the University of Manchester
Amir Lebdioui, Associate Professor of the Political Economy of Development and Director, Technology and Management Centre for Development at the University of Oxford
Piero Ghezzi, International Consultant on Productive Development Issues. Founding Partner of HacerPeru.pe, and CEO of GPD Partners
Adnan Khan, Chief Economist at the FCDO, and Professor of Public Policy at the London School of Economics
Solly Angel, Program Director, Urban Expansion and Professor of City Planning, NYU Marron Institute
Aradhna Aggarwal, Senior Advisor to the Trade, Technology, and Skill Team at National Council of Applied Economic Research, NCAER
Paddy Carter, Head of Development Economics, British International Investment
Radha Rajkotia , CEO of Building Markets
James Foster, Insights Director, Gatsby Africa
Brendan Mullen, Co-founder and Managing Director, Secha Capital
Gargee Ghosh, President, Global Policy & Advocacy, Bill & Melinda Gates Foundation
Abebe Selassie, Director of the African Department, IMF
Devon Long, Co-Head of Investment Implementation, Bridgewater Associates
Leonard Wantchekon, Professor of Politics and International Affairs, Princeton University
Ahmed Khalid Benomar, Senior Advisor to the Minister of Economy and Finance, Morocco
Moderators
Chema Triki, Managing Director, Growth Teams
Shruti Rajagopalan, Senior Research Fellow, the Mercatus Center at George Mason University
Manish Sabharwal, Vice Chairman of Teamlease Service and Co-Founder of India Life
Emily Oehlsen, Managing Director, Global Health and Wellbeing, Open Philanthropy
Jeffrey Mason, Head of Research, Charter Cities Institute
Kartik Akileswaran, Co-founder, Growth Teams
Jonathan Mazumdar, Co-Founder, Growth Teams
Stephen Brien, Visiting Senior Fellow at Artha Global, Senior Fellow at the Future Africa Forum, Chair of the UK Social Security Advisory Committee
The Growth Summit aims to reassert economic growth and structural transformation as a primary goal of development—an important priority, given that the world economy is in the midst of its worst half decade for growth in more than 30 years.
Academics and researchers, representatives from foundations and donor agencies, and policymakers and practitioners will join CGD, Growth Teams, and the Charter Cities Institute for two days of panels and free-flowing conversations on growth. Panelists will kick off the summit by describing how growth has become neglected in the development agenda, why it needs to be reasserted as a top priority, and the importance of evidence-based policy for growth. Given the presence of policymakers and funders, a major focus of discussion will be identifying tangible interventions they can take to support inclusive growth in developing countries.
This event is being co-hosted with the Growth Teams and Charter Cities Institute.
Agenda
Opening Remarks
2:00 – 2:15 pm EDT
- Kartik Akileswaran, Co-founder, Growth Teams
- Mark Lutter, Founder and Executive Director, Charter Cities Institute
- Rachel Glennerster, President, CGD
Re-Centering Growth: Why It Matters and What’s Been Overlooked
2:15 – 3:30 pm EDT
RACHEL GLENNERSTER:
OK. Can we get started? If everyone could settle down. Lot of excitement in the room, I can see, which is great. So, good afternoon, everyone. And welcome to the Center for Global Development. I'm Rachel Glennerster, and I am president of CGD. And it's my pleasure to welcome you to this on behalf of CGD and our co-sponsors, who you'll hear from in a minute – the Growth Team and Charter Cities Institute to this growth summit. It's often said that money can't buy you happiness. Yet if we look at the long sweep of human history, it's very clear that actually rising per capita income has been associated with - and I think pretty clear impacts - big reductions in poverty, improvements in reductions in hunger and early early death. It also provides that cushion of financial resources that allows people the little bit of luxuries that are so important to our welfare but also reduces anxiety. But while growth is really important, we know surprisingly little about how to promote growth. We've made much more progress on understanding kind of specific sectoral issues in the last 25 years like how to support small entrepreneurs or to reduce child mortality.
These two types of research, micro and macro, are often seen as in contention with each other. But I think my view is that actually they are complementary to each other. Let me give you a few examples. Hanushek's cross-country work suggests that growth is much more tied to the quality of schooling than to the quantity of schooling. And there's been a lot of work, micro work, including at CGD, on how to improve the quality of schooling. And we're now at CGD trying to work towards following up some of that work and seeing how children who benefited from higher quality schooling are performing in the labor market, are improving their productivity, which of course is a key input into growth. Similarly, the demographic dividend has been - by some estimates, as much as a quarter of the East Asian miracle comes from simply a change in the demographic composition of the population in those countries. And of course, the demographic change comes from reductions in child mortality, which is what we learned about micro.
So, a couple of examples of how I see the micro and macro interacting. But it's clear that we need a lot more work on the big-picture growth research because if you think of these two strands as interweaving, as I say, we've made a lot more progress on one of the strands than on the other. And growth, particularly given its huge impact on human welfare, we know too little about. One of the big-picture areas that I'm excited to be working on and have teams in CGD working on is innovation. And innovation is about the combination of how we combine labor and capital to produce more output. And it is what growth is all about. That's where we get growth from is innovation. But most spending on R&D is done in high-income countries and is designed to meet their needs. Sometimes low and middle-income countries benefit from that innovation and that R&D, grab it and run with it and make huge strides with it. I think of cell phones and vaccines as examples of that. But recent work by Moscona and Sastry shows how much innovation that is done in high-income countries is not actually very useful to lower middle-income countries, and has little impact on their growth and their output.
So, trying to think how we spur innovation to spur growth, for me, is one of the big picture areas that I hope we'll think about when we work on growth. And the need for innovation and this focus of research becomes even more important given the (AUDIO CUTS). Changing environment, it's critical that we bring the discussion on economic growth back to the forefront of development economics, and that's why we're here today. So, over the next two days, we have ambitious goals. We want to re-energize the work on economic growth and structural transformation as central to the development community's efforts. And I mean, I should recognize I see a number of people in the audience who've done important work on promoting... It's not like we haven't made strides on growth already. And the Nobel Prize just this week recognizes the importance of some of the critical work on growth. So, we want to re-energize that work. We want to explore tangible interventions and initiatives that external actors can support to contribute meaningfully to inclusive growth.
And finally, we aim to create a network of researchers, practitioners and funders to advance this agenda. As we build this agenda on growth, I want to challenge you all, everyone in this (INAUDIBLE) to make sure that our efforts remain evidence based, grounded in rigorous research, but also provide practical policy lessons that people can act on. Our policymakers and funders want to see their investments lead to efficient interventions with observable outcomes. But we're fortunate enough to have gathered here a group of experts, high-level government officials, funders and practitioners who can do just that. Unfortunately, I won't be staying for the whole of the conference. I will be in and out today, but I'm gonna leave you in the capable hands of Mark Plant as our representative and CGD host. And before I hand over things to... Oop!
KARTIK AKILESWARAN:
I'm miking up.
RACHEL GLENNERSTER:
OK. Miking up. Because this has been going in and out, I guess. But I do want to then take the opportunity to thank Open Philanthropy and Bridgewater for their generous support of this summit. And I will wait to hand over. I'm happy to keep talking while I wait for them. I wanted to... Just picking up on the idea of how you can combine this macro and micro, the Nobel Prize work, Acemoglu, Simon and Robinson looked very... Can look quite not very policy actionable. Like you can't go back and change who you were colonized by or how you were colonized. But I think actually there are a bunch of researchers who take those ideas and then think about, well, how can we reform institutions? That's one of the things I've been doing. For example, how can you practically go about strengthening democracy if democracy is one of the things that you think is correlated with growth? Now, he is back. I'll hand over to Kartik, co-founder of Growth Teams to say a few words. Thank you. (AUDIENCE APPLAUSE)
KARTIK AKILESWARAN:
Thanks very much, Rachel. Good afternoon everyone. My name is Kartik Akileswaran. I'm a co-founder of Growth Teams. We're thrilled to have all of you here for the next two days. Thanks very much for coming. First, I'd like to acknowledge some people who helped make this event happen. A big thanks to Open Philanthropy and Bridgewater Associates for funding the event. This is the first of what we hope will be a regular convening in the future. Next, I wanna thank the Center for Global Development, especially Mark Plant, Thomas Ginn, Charley Ward, Eva Bianco and the events and comms teams. They graciously agreed to host this event and were instrumental in inviting many of you and sorting out all the logistics.
I also want to thank our colleagues at the Charter Cities Institute. We're happy to have partnered with them to make this a reality, especially because we share a common goal of recentering economic growth in the development community. And lastly, thanks to my team members, Jonathan and Chema for all their hard work in planning this event. Apologies for the long preamble. So, first, I wanted to share a bit about what Growth Teams does. So, we wear two hats. First, we support governments in Africa and India to unlock barriers to investment, exports and jobs through our previous experience working with governments on growth strategy. We've observed that they need more than just reports and analyses. They need help putting their strategies into action. So far, we've worked in Rwanda with the Rwanda Development Board to attract FDI into job creating services activities. We've since expanded to Tanzania to support the Planning Commission on its economic plan and institutional arrangements to implement it.
We're also working closely with a couple of state governments in India. On employment, investment, and industrial parks. The second hat we wear at Gro teams is to catalyze the field of economic growth and development. Our view is that this field has been neglected in recent years relative to its importance. The scale of the economic growth challenge is immense, especially given the difficulties that climate change, debt sustainability, a changing global trade environment, and other issues pose at present. We believe that we need as much talent, resources and attention on the growth question as possible. While governments and private firms are the two primary actors in this domain. We feel that there are additional, perhaps underexplored, ways in which philanthropy researchers, implementing organizations, and other actors can engage productively. One of our field strategy efforts is this summit, which we conceived of alongside CCI about one year ago. Through regular monthly conversations with them, we began to develop the idea for convening to coalesce a community around growth, and we first put pen to paper on the concept in July of last year.
The goals we initially outlined back then still guide us today and have evolved into three main objectives, which Rachel also touched upon. So, first is we want to highlight why economic growth is the central issue for developing countries. Ahead of this event, we asked our advisor, Lant Pritchett, who has been making this case in recent years, to synthesize the arguments for why economic growth is so critical for various aspects of human welfare. You can find a link to his paper on our printed materials and on our website. Second, we want to show that there are a number of things that are already happening and that we can do in addition that can usefully contribute to the cause of economic growth. One view we hold is that there's plenty more space to work on topics that are complementary to the traditional focus on macro and trade issues. This includes work on export promotion, foreign investment, demand-driven skills development, and firm productivity, among others. During this summit, we aim to showcase concrete activities in these areas, identify gaps, and draw lessons that can be applied more broadly.
Finally, we brought you all together because we believe most people here agree that growth is of utmost importance. This calls on us and the global community at large to figure out how to accelerate it. The summit serves as a platform for this cause. Our aim is to build upon this event to form a coalition that can gather and direct more resources, attention, talent, and effort to help developing countries achieve prosperity. With that, I'll hand it over to my colleague from CCI, Mark Lutter. Thanks very much and I look forward to the next two days. (APPLAUSE)
MARK LUTTER:
Hello. I guess we're not using this. Hello. I don't know which is plugged in. Alright. I'm Mark Lutter, the founder and executive director of the Charter Cities Institute. We're a nonprofit building the ecosystem for charter cities. Before I start, I'd like to thank both Growth Teams and the Center for Global Development for co-hosting this event with us, as well as the team at the Charter Cities Institute, because I only started as executive director, I don't know, a month ago. And so, I'm taking credit for all the work they've done spent the last year doing. The fundamental question of economics is, to quote Adam Smith, the nature and causes of the Wealth of Nations. The proximate approximate answer is economic growth. Wealthy countries have had long periods of sustained economic growth. Poorer countries haven't. Growth, however, as mentioned by the two recent speakers, has become somewhat deprioritized recently. There's been a lot of focus on and research on more tractable micro questions.
While these broader questions of how to accelerate economic growth have become slightly deprioritized. Of course, the Nobel Prize is shining a little bit more light on the importance of institutions, a relevant precondition to growth. However, even what institutions mean, much less what the specific levers countries can pull to cause economic growth, remain, I guess, less illuminated. This summit grew out of the idea that, one, growth is important, and two, identifying clear causal mechanisms to accelerate growth is something that the development community, practitioners, and funders can meaningfully contribute to. Now, cities are an important part of economic growth, right? Historically, cities have led to dense labor markets, increased productivity, and helped contribute to the wealth that we see in many nations today. China their economic growth over the last 40 years has largely been one of urbanization combined with special economic zones. Deng Xiaoping, having taken power recently after Mao's death, declared four special economic zones, one of which was Shenzhen.
Now, while these are typically referred to as special economic zones, in some ways, they resemble more a charter city, right? The amount of land in Shenzhen that was designated as the zone was 320 squire per kilometer. So, this was not an industrial park. This was a city-sized development. The amount of authority delegated to the Shenzhen government It included everything except rail, post and telecommunications, banking, civil aviation, national defense. Everything else was delegated to the provincial government. Within that provincial government, they initiated, for example, land labor law. Financial regulations later created a market in land, and some of these institutional innovations that then spread throughout the rest of China and contributed heavily to economic growth. Today, we are undergoing humanity's final wave of urbanization. Western countries hit 50% urbanization around a century ago. Many countries in East Asia hit 50% urbanization. About 50-40 years ago, the world hit 50% urbanization about a decade ago.
And this urbanization is both a challenge and an opportunity. It's a challenge to the extent that, for example, in Africa, over the next 30 years, there will be 1 billion new urban residents providing infrastructure, both physical as well as governance, for these new urban residents is a major challenge. It's an opportunity because it's possible to enact a substantive governance reforms in areas that are not currently populated, that are drawing a large population because of city growth. That can serve as test beds for policies, for institutional reforms, as well as planning reforms that can set the seeds for sustained economic growth. Tanzania, for example. Dar es Salaam has currently has a population of around 5 million. By the end of the century, some estimates have its population at up to 80 million people. Right. How do you accommodate these 75 million new urban residents? And how do you make sure they're not just trapped in slums for the rest of their lives, but they have opportunities to participate in the global economy, to achieve better education, and to lead to good outcomes.
It's much easier to do that before that urbanization occurs than after. And I guess to put perhaps another spin on this at the Charter Cities Institute. We work with these countries in Zanzibar, Kenya, Zambia. We've worked in Nigeria. And to quote Mike Tyson, "Everyone has a good plan until you get punched in the face." Right? And you can have very good ideas. But on the ground, reality and interaction with local governments with local institutions can present a real challenge. And I think part of the goal of this event is to bring together the academic community, the funders, but as well as the on the ground practitioners who have experience getting punched in the face, who know how to get back up, who know how to interact with these local institutions and build something successful. So, before I close, I'll also mention briefly another project of the Charter Cities Institute that you'll hear from, tomorrow, Leonard Wantchekon, who's the founder of the African School of Economics. We've partnered with him to open the African Urban Lab in Zanzibar to train the next generation of leaders in East Africa on urban policy, on urbanization.
And so, you've all got a free invitation to Zanzibar. Kurtis has an extra bedroom in his house there. And so, with that, I'd like to thank you, particularly Open Philanthropy and Bridgewater, for their financial support and look forward to getting started. Our first panel will be led by Sheema Tricky. And welcome to the stage. (APPLAUSE) (MUSIC PLAYS)
CHEMA TRIKI:
Can you hear me? Perfect. Hi everyone. Thank you all for coming. Excited to see so many prominent experts in the room. And I hope we're going to have really interesting conversations over the next year. And a day and a half. Not here. We could spend years talking with our panelists. I'm here with, as you can see, very prominent experts, academics, practitioners, and policymakers. And it's obviously we have tried to curate the program in a way that bring different actors together, including funders. We're going to hear from them later on to be able to converge a bit our view on why economic growth is important and what to do in it. Exactly. And what does it mean? And we're going to touch on the question also the role of external actors like us what we could play in an effective manner. So, without further ado, I know you've been you're waiting to hear from our prominent experts here. Let me introduce them first. Most of them do not. They don't need introduction, but just to do things properly.
We have Prof. Stefan Dercon, who is a professor of economic policy at Oxford University. Also, former chief economist at DFID, now FCDO, and an author of a very successful book called ‘Gambling on Development'. I'm sure most of you have read it. Thank you so much for coming. We have Doctor Vera Songwe, so she's a founder and chair of the Liquidity and Sustainability Facility, also senior fellow at Brookings, and former many throughout many roles in many development and international organizations like World Bank and UNECA. Thank you so much for coming. We have Doctor Arvind Subramanian, who is a distinguished Senior fellow at CGD and also former Chief economist, advisor to the Government of India, a continent, a continent country. Thank you so much for coming. And last but not least, we have with us Doctor Hakim Ben Hammouda, who used to be Minister of Economy and Finance in Tunisia through a political transition and democratization. So, very interesting setting in which we're going to hear from.
So, we're going to have about we're going to have seven minutes of presentation, first by panelists and then a follow up question, and then we're going to have 30 minutes of Q&A with you guys. So, please prepare your most thought provoking question, your most insightful questions for our panelists. First, we're going to start with you, Prof. Dercon. So, as I mentioned, you've been a chief economist at DFID, now FCDO, one of the most prominent donors and funder, especially in Africa. And I wanted to ask you first to lay out the ground for us what was how did you feel that the country is mostly developing countries that you've been supporting needed really support on growth and why, in which sense? And if you can give us really insightful examples, that would be great.
STEFAN DERCON:
Very good. OK. Well, thank you very much. And it's great to be here. I think it's the first time, as far as I know, that both myself and Rachel as a successor, and Adnan as the current chief economist of FCDO. In the same room, I think, I don't think it's ever happened before. So, it's nice to do. So, I talk about a bit my experiences of that period and what I've learned. You know, we will have learned in different periods, different things. So, I was there looking at in the 2010. And so, I think there's probably three things. So, the first thing is that it was definitely clear for us, and we could argue a lot about some of the details. That growth was an essential condition for progress. There's virtually you. I can't think of a country that has sustainably reduced poverty improved human development indicators in a sustainable way that didn't also manage to actually get growth at a serious level. And, of course, the last three decades, say up to 2022, three decades. It was like for low and middle-income countries, something like close to 3% growth per capita per year on average.
So, it's actually quite a successful time. Now, we may not know every detail of how to get growth going, but we know that within that 3%, some did substantially better. And so if you look at Chinas, the Indias, Bangladesh, Indonesia, Ghana, Ethiopia, they did better than that. And there's also a bunch of countries that stayed behind like the Nigeria’s, the Pakistan's, DRC, South Africa as well. Now, it's quite interesting, especially places like DRC and Nigeria. That's where basic poverty indicators, which arguably are different at the time. And as FCDO, we would be focusing on, it's where they stayed behind. So, this growth path is definitely a big, big part of it, and it's important. And I would say it's even more essential today because some of these countries that were quite successful, like a god or like an Ethiopia. They also have their growth crisis now. So, in some sense, especially like today, it's probably even more important than it was in the thing. So, I do think it's this necessary condition for development, for growth to actually—sorry. Necessary condition for development is to get sufficient growth and to keep it going. And so just make sure there's enough focus on it. But the second lesson I had, and that I worried about a lot, is that the disjoint between the things that we may have been focusing a lot on relative to this, that actually there was a certain disjoint developing this, there's nothing wrong. There's actually a lot of good that we can do by focusing on social sectors. But to get that support sustainable and different was supporting a lot of social sector development. You also need the growth, and you need to somehow have these mechanisms. And at the same time, while in this period, say the 20 tens, but even the decades before, you could argue development agencies like defeat and defeat at a time we were doing quite all right. But it is also to do because countries had a growth model to engage with globalization. They could engage with it as well. And so, it's again, why I'm now actually very concerned is that we are not quite focusing very much on the growth part, but actually there's not a there's not an easy growth model to engage with geopolitics and green politics.
While I don't want to deny these things are important, but it's not so obvious anymore that there is an easy growth model for poorer countries to engage with. So, I would say there's an increasing disjoint with what the international organizations are offering and the development agencies and what actually the needs are. So, now maybe the final lesson that I would want to emphasize is that what is what I think I've learned what the role of the outsider is. Now, there's a, There's of course, things we can do. We can give finance, we can give advice, we can give ideas, and so on. But one of the things I definitely learned is that just thinking of that supply side is not enough. And now I have no idea how a country like Malawi can become Singapore. Well, I have actually a reasonable amount of ideas of what Malawi can do a little bit better. And actually, I'm often reminded by something that Donald Kaberuka said. At some point, I was in a closed meeting with a lot of African finance ministers, and he was basically telling them growth is a choice for you.
So, we may not know how to do Singapore, but actually some of these countries, you can actually do better. And you have to ask the questions why are they not doing better? And I think that's definitely the final thing that I learned. Of course, there was a bit like what I was trying to talk about in my book, which, by the way, most of the chapters were back to the office reports when I was chief economist of DFID is to thinking a bit better about it. Why is it that growth is not quite happening quite a few of these places? And what can the outsider do? And so, the key issue is here for me is that growth is a political choice. And it's a very difficult political choice. Now, the way international agencies have approached growth is entirely or it's all about technical advice. No. People in countries that are powerful and influential, if they choose growth, they're taking a risk because they're taking a risk to actually have the status quo may be changed. Historically, that's happened, of course, when our country started growing.
And we should just make sure we understand that that actually and this is my big third lesson, is that actually there are countries that seem to have made this choice, and we should support him in all kinds of ways. There's also countries that clearly are not making the change, and that's the ones that I'm mostly interested in and how you can begin to think about of actually how do you support them to actually nudge them, help them, support them? Maybe those people inside these countries that actually want to do it. In my book, I was talking about a lot of the countries they may have an elite bargain for the status quo. Some may have a deal between powerful groups that actually involves growth. Now, as eight organizations, we knew quite well how to support the latter. If Bangladesh was doing reasonably well with growth, it got all quite different. Ethiopia was doing well. Ghana was well. Aid actually had a pretty high return, but it wasn't particularly clear what we would do in DRC, in Nigeria.
And in fact, we've still not learned that very well. And so, this is where I think it's really what I feel like I've said lesson is that that politics? Let me briefly say what I think we can do, and I'll let me finish with that, is that there's probably three things. I'll tell you a little bit what I'm interested in, and maybe other people, if they're interested, please talk to me more. So, the first thing is, I think to put growth back on the table, we also have to think globally as a development community. What is what can we do as thinking in terms of a growth model that we can offer, that these countries can engage with? So, if there are reformers in countries that actually want to engage with it, it was to be quite clear, you could do export-oriented growth, and you could do it. Now with geopolitics and including with climate things. It's not so self-evident. You're not simply saying, oh, well, we have a green model that definitely will work. We haven't even dared to do it ourselves.
So, why would you get the poorest countries to be the ones that need to experiment with it? So, there needs to be some serious thinking of how they can engage. The second thing is then how can we support the countries that generally want to engage with where at least there are some people that want to engage with growth. So, how do you begin to support them? And so, one of the things in the last year or two years now trying to do is to actually can we find entry points, windows, opportunities, groups of people that may well want to do this, can we begin to work with them? So, we're doing work in Ethiopia and South Africa, and Sierra Leone. But let me briefly say Pakistan, which is just very fascinating. It's a country on its knees. Geopolitics is such that geopolitical rents are not going to flow to Pakistan anymore. Washington will not write the checks all the time because there's no more American soldiers in Afghanistan. So, it's on its knees, and it needs growth. And so, we got a phone call from the Prime Minister's office.
Can you come and help us to get a growth agenda together? Now, Prime Minister may be alone. There's plenty of spoilers around anyway, so we work there the last few months trying to get the growth agenda together. Quite interesting stuff. Trying to say, look, we're not going to write it. We actually got the senior civil servants trying to put something together that is reasonable. And can we see whether we can begin to implement it now we get all the stuff that you can imagine. And in the end, let's say there was an interesting meeting that involved the chief of the Army where I clearly said no. Having said that, it's not dead. There is stuff happening. And I think, I think it is important for us to work and find these windows of opportunities where you're willing to accept growth is politically in these places, trying to see can you begin to unlock. And so, I will put some leaflets out later on if people are interested. Because we would be very interested with people in this room to see whether we couldn't work with others like-minded people that actually really knowing well that the international community somehow donor agencies, the trust is very low.
Be willing to actually step in here and there in place and say if there's a window of opportunity is what can we do? How can we begin to unlock? How do we work with different places to actually see? Because for me, the bottom line is without growth, we're not going to get out of debt. We're not going to start getting poverty reduction back on track. We can't just do it. And I fear that the offer from the international community at the moment is weak. And so maybe people here in the room would be quite interesting to push this further. Thank you.
CHEMA TRIKI:
Thank you so much. I have a follow-up question, but thank you. We're going to come back to you on that. Now, moving to Dr. Vera Songwe. You're a prominent figure among global economists and in Africa, and you've been in different roles across a number of development institutions, from the World Bank to UNECA, where you played a big role. From your all these experiences, how do you feel these development institutions have actually delivered on growth, have basically developed programs and interventions in the wrong way, and in which way they have faltered as well? The floor is yours.
VERA SONGWE:
Thank you. Let me start by thanking, of course, CGD's kind of home as well, since I'm a senior fellow here, but also the Chartered Institute and the growth team really for putting this together. I see some very nice and friendly faces in the room, like Abebe, that I haven't seen in a very long time. And so, I want to say hello. I'm really, really happy to be having this conversation. I don't think we can almost understate the importance. I think for the last three years, I've been having these discussions, and I'm very happy to have these discussions, but we've been talking about debt and crises and debt distress, and really, the only the best way to not have those conversations is to talk about growth. And I almost feel like we had forgotten that countries needed to grow. And we were just thinking about how can we just barely keep them alive. And so, I think it's good that we are now hopefully really transitioning to have a discussion on what is the growth model and how do we do? We do we make sure that we bring that back.
And I think as I was preparing for this, I was thinking to myself one could talk about where we are today, but it's very maybe difficult to start with where we are today. I think it is important to take a little bit of a step back and see some of the contrasting conversations that we've had. And everybody in this room has probably heard about the Ghana example and the South Korea example. And how Ghana and South or South Korea was a basket case. And Ghana was the one that was supposed to do well, but there were some initial conditions that made South Korea go one direction, and Ghana go the other direction. And I'm doing some work which is actually looking at what was your source of energy and what was your cost of energy. And if you look at South Korea was essentially eight cents a kilowatt of coal. Huge polluter. And Ghana was on heavy fuel oil, 37 cents. It didn't matter what Ghana was going to be producing. Ghana was never going to be South Korea. Right? And I think, and I say this because I want to start with your question of what has developed what have development institutions done.
And I think that many of us have gone to these countries and said to them look at this place and look at this place and how well they're doing, but we haven't necessarily unpacked all the initial conditions. And by not doing that, we have done ourselves and those countries a disservice because... And by the way, South Korea has just decided that they're going to keep doing coal for another 12 years because they cannot quickly transition because they are giving all of us our chips. And the easiest way and the cheapest way to get your cell phones and your iPhones working is that they continue to do it with coal. Now, if you are supposed to punt to something different, then the competitive competitive advantage is going to change, and you have to do something different. But you take again South Korea, and you take the Philippines. And I lived and worked in the Philippines for five years. And what you see again is South Korea in 1960, the Philippines in 1960, more or less the same GDP per capita...19 by 2015, South Korea's GDP per capital has increased 33 times. They've gone from $1,000 to $33,000. And Philippines has gone from $1,000 to $3,000 in the same period. And so, then you start asking, and the Philippines also was using some coal and had some renewable energy. But there was something else that was different was the institutional framework. There was a much more closed society, there was a much more command driven society. There was a much more oligarchic society in the Philippines versus South Korea. So, two things that are happening. One is the access to resources, but the other one is the nature and the sort of structure of the state. And we all worked, when we were working in the Philippines, we always used to say, you know, you need to open up, you need to do the market reforms, you need to do. Exactly, your exchange rate needs to be good. Your human capital needs to be better. The Philippines had really good human capital actually compared even to initial conditions in South Korea, because the Philippines, of course, was a huge US military base.
So, everybody spoke English and everybody had access to sort of good education. And so essentially, human capital alone was not enough. You needed institutions as well. And I think Rachel has spoken a little bit about the Nobel Prize. So, I think one of the things that we didn't do so well as development institutions was we fixed the financial, I wouldn't even call them the financial institutions, because what I'm doing now is working on the financial sort of capital markets. We fixed the central banks and we fixed the Ministry of Finance. And those were two institutions that were critically important for us who came and wanted to, you know, to see that the fiscal deficit and sort of do that calculation very quickly and come back to Washington and say, OK, we've made sure that the deficit was 3%, and they're not gonna do more and they're not gonna do anything. And oh, by the way, exchange rates, you know, we've made sure that capital markets are open and everybody can come in and out.
Korea didn't do that but that quickly I hasten to say. And today, we have now gone back to, you know, we can do some capital controls and we are OK. And I think that we have not done work on what is the cost of wrong policies and how difficult is it to sort of go backwards. And so, that's the first I think, sort of bucket for me, which is holding back growth and looking at sort of what are the comparative initial conditions that this country's had, and how did we then help them to move? So, that's the first part. The second part is around looking at sort of what has happened in our agriculture sectors, the industry and services. Today, Africa is growing. A lot of Africa's growth is coming from the service sector. So, we've sort of begun to get out of agriculture. We are not doing anything in manufacturing. And I challenge all of us to look at how many World Bank reports after missions said you need to do these five things to get manufacturing going. There was never any. We didn't do enough to build the manufacturing sector.
We just did not do that. So, that whole productive sector, which is essentially is, you know, if you're going to sort of tell everybody, you know, let's make your agriculture sectors efficient, then what happens is that that label moves into manufacturing. But in our systems, the labor didn't have anywhere to go. So, they became, what I have been fighting for so long against was we "fashionly" started calling them the informal sector. This was the failure of development to produce and provide the advice that will get the manufacturing sector going. So, we kind of missed that curve from agriculture to manufacturing. And so, what happened is then we took off into services. And those who succeeded in that transformation of services are doing more or less well. But services actually works. If you look at the East Asian economies, they did a lot of manufacturing for a long time. They were able to absorb a lot of their agriculture into manufacturing before they moved to services. A lot of the African economies have gone from, sort of coming out of agriculture into services.
We've not had enough time to absorb labor. And another problem that we have in a lot of the development work that we do is that we just don't have labor data. In many of our countries, we do not have good labor data. And so, yes, we have, again, back to my first point, we have very good macro-fiscal data, but we've not, never, you know, to actually talk about the fundamentals of a performing economy and growth, you need to understand the labor market. You need to understand the cost of that particular sort of factor input and the amount and the quantity. In the United States, every month we are thinking how many new jobs were created, how many were destroyed in what industry. In half of the African countries, we cannot do that analysis. Very difficult to even then have a good conversation and a sort of respectful conversation around growth. And so, I think we do need to go back. And what has also happened then with innovation, which is a huge sort of important element of growth, is that because of innovation, the time it takes for you to move from manufacturing to services is becoming much shorter.
So, essentially, we're having these people sort of trying to get out of the agricultural sector. Our manufacturing is not well done. We don't have it. So, we are falling into the informal sector. It's a much shorter timeframe. The services sector needs qualified, high competent human capital, and we're not getting in there. And so, it is actually sort of tightened and made growth a lot more difficult. And I think on, and finally, on the innovation side and the institution side, where we actually then now are most of us, we can, and I'm struggling with, can we go backwards and do some more manufacturing before we come back to services? Or do we stay in services and do it well and do it better? I think what we then need is institutions. I cringe and I'm about to say something that's gonna, you know, so many times I sit in all these meetings, and you will have Africans and Latin Americans, we will come and tell you how much copper we have and how much gold we have, and how much, you know, and we have all these extractives.
But if you have, and we never say how good our institutions are, but you can have all the extractives. If you don't have the institutions that help you to organize and allow for freedom, economic freedom to be able to actually transform and produce, then it doesn't work. And that is why, yes, we have 80% of cobalt and 30% of platinum, and 25% of gold and 20, 90% of this. And we're not working because the institutions that need to then provide the growth and the innovation and the transformation are collapsing. And so, I think for me, if we are able to sort of, kind of, and it's great. I was very excited when we had the announcement of the Nobel Prize on sort of, the sort of innovation. It is the ideas. If we cannot transform those ideas into services, into productive assets, it is going to be very difficult. And finally, now, I'm doing a lot of work on the financing side, which is the cost of capital because we've spoken so much about debt, and I think we do need to find out how we can also do that and improve on the cost of capital.
CHEMA TRIKI:
Thank you so much. And your point around services is obviously also mostly unproductive services. These are not tradable wholesale and retail being the sector that has created most of the jobs. So, we're witnessing also an urbanization of the poors in Africa, which is a big problem. Thank you for that. We'll come back to a follow-up question, but now we move to Dr. Arvind Subramanian. So, you've been a chief economist advisor of the government of India. As I said earlier, a continent in itself similar number of people that are living in the whole continent of Africa. From your experience in that role, but also within global institutions, how did you feel the basically the tension of priorities between the need for growth strategy in India and then the priorities of development partners, like climate, social development, et cetera, and their diversion a little bit from growth? Or did you feel that tension? Maybe I can start there and leave you to (CROSSTALK)
ARVIND SUBRAMANIAN:
Yeah. First, thanks very much for having me. I came prepared with something and you know, when I listen and come and listen to people here with my triggers are set off in me, and (LAUGHTER) I get very kind of upset. So, I'm going to have to abandon my notes. The challenge when you come to a topic like this is the two challenges, you know, how do you avoid repeating lands? Very, very persuasive case for why growth is important. And the second is, how do you avoid also what I would call the land rant against the drift in economics towards all this stuff that is going on? So, let me make my point, number one, when I hear, oh, growth has been deprioritized in favor of social this, that that is not true in the places around the world, in the capitals around the world, this is a kind of absurdity of the outside world. In India, in China, in Korea, we are obsessed about growth, we've been obsessed about growth for the last 40 years. We will continue. I can't speak for the whole world, but I have a real pity for those who are dependent on FCDO, USAID, World Bank, the North Atlantic seaboard, who feel, oh, do we need to prioritize growth or something else?
So, I think, let's be clear, this is very much the conversation about the drift is not a reality in the, I mean, we've been obsessed with growth so and will continue to remain. So, now, point number two is that but it is unfortunate what has happened in the outside world, especially in the intellectual climate and amongst donors and amongst philanthropists. Let's be honest about this. And therefore, I see this conference as kind of welcome soul searching. Hopefully, it's welcome mea culpas on the part of intellectuals internationally, philanthropy and CGD itself that, you know, what can the outside world, you know, how it can get back the growth agenda. We are quite doing quite well without your whatever, right? (LAUGHTER) Now, I mean, what can I say about the importance—I mean, it's absurd, but even discussing why growth is important, I mean, it's completely absurd. And let me just make the case in India that, you know, we have debates in India. Our two greatest economists are Amartya Sen and Jagdish Bhagwati.
And one says growth, one says social sector, equity, et cetera. And of course, they're both totally, both totally kind of not wrong, but incomplete, because the truth is growth just changed everything in India. It changed the demand for education. It changed land and (UNKNOWN), how it changed society or at least began to change society. And in the book that Devesh and I are writing, it changed state capacity because the more money there is from growth, actually, the equilibrium between rent seeking and delivery actually improves a lot like China that you have more growth, you have more thing to grease the system. And therefore, growth in India has also led to a lot of migration. And so, I say that growth in India has been grist, grease, glue and getaway as well for all these things. And most importantly, I mean, growth has just made India a completely different aspirational society. Growth is not just about avoiding insecurity. It's about, you know, hell, I have opportunities like everyone else, and I know, how do I take advantage of that?
So, I think, the importance of growth, I think we have never doubted. But if you guys wanted out, you're free to do so. (LAUGHTER) So, I think the question for this audience is, therefore, what do you, as outsiders, what can you do to help development and therefore consistent what I've said, I think the first thing all of you require is utter sense of your, you know, very small self-importance in this role. You have to be humble. You have a very small role to play. I'm not saying you have no role to play, but you have a fairly small role to play. And be suitably, I've cognizant of that and humble about that. So, I mean, now, I've been, so far, I've been a nihilist. Let me be a bit more constructive about what outsiders can do. Look, broadly, I would say this is a kind of comparative advantage or division of labor here which is that outsiders should one focus on providing global public goods because that doesn't require you to be intrusive, et cetera, in the countries themselves. And I think the sad truth is that the global community has had a completely shoddy record on providing global public goods.
I mean, during the pandemic, there was this global public good vaccine. The interdependence of everyone is, no one is safe until everyone is safe was acutely recognized by everyone. The money involved was a pittance and the world completely failed on that. So, there's an agenda out there for global public goods, you know, get on with it. You've been shoddy at it, but get on with it. But that's something that that you can do. The second, which I think was why I think CGD, the original mission of CGD, which I think it's drifted away from, and I'm sure now it's being revived as well, is outsiders can influence the policies of your own countries. And that was CGD's wonderful original mission, you know, how can rich country trade, whatever, whatever. The problem today, and Stefan, I think, was alluding to this, is that on the list of what rich world can do, you're shorty at providing global public goods, you're erecting trade barriers, left, right, and center. Migration. I mean, it's shambolic what is happening.
And God forbid, November 4th, the bad outcome happens. Migration as a policy tool is going. Finance, you know we can't produce billions, but all our rhetoric is about, oh, now we've got trillions and zillions, whatever. You can't even produce the billions. So, trade finance aid, the levers that you can pull, you're unable to pull. So, there's a dilemma for outsiders. So, you can't do the global or you haven't done the global public goods. You can't... I mean, the politics is becoming more and more difficult to provide these things. So, what do you do now? I think that this is my kind of maybe diagnosis here is part of the reason all of you have kind of drifted towards this. So, in my thing, it's not growth versus sector, whatever specific. I'm gonna be a bit pejorative and say we've basically, all of you, not me in the developing world, have moved from what I would call macro development. I'm not going to say micro development. I'm gonna say you've gone from macro development to nano development.
(LAUGHTER) That's what you guys are doing. And part of the reason this drift has happened is because you have nano resources, especially, and the philanthropies here, by the way, are completely complicit in this. So, you have nano resources. You can't do the macro development because you have nano resources. And then you have impatient clients because all the philanthropy guys, you know, everyone wants to know that his dollar is having an impact. And frankly, you've had this kind of pseudo revolution of the, you know, this identification revolution that's kind of selling the thing that actually we can show you that your dollar is producing something, right? So, there's this kind of pseudo. So, for all these reasons, you cannot do the macro stuff because you cannot promise people that their dollar is going to get 10 rupees of growth or whatever it is. And you cannot do it in the timeframes there that their impatient timeframes demand. So, you have to, so you've all drifted into this nano development stuff and you're all very happy with yourself that, you know, you've done this there and then there and whatever.
But the point is you've had really no impact on macro development. So, I think therefore, you know, to be a bit more constructive, I think therefore, this conference is a very good opportunity to kind of recalibrate and ask where in terms of the global public goods the rich country levers that can be pulled. And of course, the third lever, it's kind of a little bit consistent with what Stefan was saying. Maybe outsiders have a role to play also in shaping countries internally. But it's a very dicey thing to do. It should be done…The optics of this are very difficult. And it has to be opportunistic, where there are propitious environments, like what Stefan says in a political economy. And but what I would urge also is that, you know, because I'm trying to do some of this stuff, and now I'm an outsider, so (LAUGHTER), even in India, I'm an outsider. But I think to think about this not as growth and social sector, but as nano development and macro development, and therefore, macro development doesn't just mean growth.
It could mean fiscal policy, it could mean tax policy, it can mean as in many, many states in India, power sector, which has macroeconomic consequences. So, first, get on to doing public goods for God's sake. See what are the levers that are left and how you can change them and be kind of imaginative and opportunistic about what you can, how you can help developing countries themselves. And here maybe the message for philanthropies and everything is that maybe it's like a venture capital model. It's a very risky business. You cannot promise to deliver returns on time. You certainly cannot show people that because of what you did within six months, some big outcome happened. You cannot. You have to be humble about that as well. And within these constraints, do the best you can, be venture capitalists, be opportunistic and let the chips fall where they may.
CHEMA TRIKI:
Thank you so much for that honest (LAUGHS) (AUDIENCE APPLAUDS) and very thought-provoking discussion. I know the time is running out, but actually we started 15 minutes late. So, I'm gonna take the 15 minutes more 'cause this is such an interesting conversation. We moved our last panelist, Dr. Hakim Ben Hammouda. So, you were Minister of Economy and Finance in Tunisia, which was so-called miracle, growth miracle in the '90s by a number of development institutions. And actually, what's interesting about your role is that Tunisia was going through democratization transition when you were a minister, and there was also a tentative to bring economy and economic planning and thinking with the finance aspect. And that's how the Ministry of Economy and Finance was created when you took your role. Can you tell us a bit more about what does policymaking look like in such a setting? And how did the development partners help you or not help you? Not to be critical, only critical, but also maybe just to, from your point of view, as someone who was on the ground and has walk, walked the walk, what does it look like and what are the challenges that you faced?
HAKIM BEN HAMMOUDA:
Thank you very much, Chema, and thank you for the invitation. And I think it's really a timely conversation. Glad to be here with some friends, with Vera and other friends. And in fact, it's not easy to be the last (LAUGHTER) speaker, (LAUGHTER) the last speaker with such a distinguished panel. But at the same time, I think, how do you call it? Very provocative presentations by my colleagues in the panel here will open new area of thinking and ideas on the situation of growth in the developing countries. I'll come back to your question. Arvind, I think it was really, how do you call it? What you said about obsession of growth. It was quite interesting, very, very interesting. We are following, as a researcher in academics, we are following what East Asia, East Asia, China and India were doing, in fact, in the last two, three decades, were really growth and structural transformation, were really the major priorities of the country. But this is not the situation of a lot of developing countries.
So, we need to have really, you know, this, I think this is one of the most important issues that developing countries are really, are not the same, different experiences, different trajectories. And in fact, in some other countries, the obsession were really the budget deficit and the macroeconomic stabilization. And this created really a huge culture of which actually marginalized growth from the agenda of the policymaking in a lot of different countries. I'm talking about African countries are also North African countries or MENA region country, where in fact the difficulties, the challenges countries are facing in the last 30 years or the last three decades, in fact, put really the macroeconomic stabilization as a major, major issue and really the headache of the Minister of Finance is to make sure that is going to pay at the end of the month the salaries, the salary of the people. And second, make sure that he's not in default means that he's really able to, how do you call it? To pay all the bills coming from international community.
So, this is also a situation. And this situation, in fact, were very, very difficult in fact to really to deal with and to give priority to growth in a lot of these countries, I don't know, maybe it's, how do you call it? Strategic challenges. Maybe it's conditions of the '60s and '50s, the development priority. But this was the case almost from the mid-'80s up to, up to today. It's really the debt distress, which is really becoming a very strong difficulties, strong priorities, and the number one priority of a lot of African countries and a lot of developing countries. So, the situation in the developing world is mixed. There is sure countries and of course, the countries who are able, in fact, to put growth as major priority, were able, in fact, to really, to make a lot of progress in different things. But this is also the situation of a lot of other countries. And in fact, this culture of having the macroeconomic stabilization was really developed in the last, as I said, for the last three decades, as Vera was saying through giving the lead in building in policymaking to ministers of finance.
And ministers of finance were really the, how do you call it? The growth. The main priority of them was really the fiscal deficit. And make sure that the fiscal deficit is within. This is one second. I think it's a huge, it's the marginalization of all other departments who are dealing with growth. Ministry of Industry is marginalized, is nothing limited staff, no strategic priorities. Ministry of economy and planning also quite marginalized. So, this is the context. Second, third, I think, which contributed to this culture of stability, macroeconomic stability is the reforms of the central bank. I'm supporting the reform, the independence of the central bank. I think it's important. But at the same time, in fact, in this movement of reform of central banks in a lot of developing countries, including African countries, starting in the mid '90s, the priority was price stability, not anymore growth. And you create, in fact, and you create a coordination between different, Vera was mentioning that between different institution dealing with policymaking in the country, where, in fact, the major priority and the huge priority is really the fiscal stability, the macroeconomic stability.
And this, I think didn't help, doesn't help growth in the last three decades. So, this is really a huge challenge. I think a quick one, a quick word on the impact of this, on the social, but also on the political situation in a lot of African countries and a lot of developing countries, first from social, I think the level of employment and the level, particularly in fact, of migration of qualified people to this place, to North America, to Europe, because, in fact, they were not able to really to contribute to their... But this level of employment and also were a major element in the crisis of the democratic regimes in a lot of African countries. And this has helped a lot in the growing of new political forces were against the democratic system, accusing, in fact, the elite and the formal system of for not being able to build, how do you call it? To growth, to respond to the needs of the people. Quickly. I don't want to be long. I think just from my own little experience and I think the, what should be now the priority, I think the most priority number one is to reduce the debt distress on a lot of countries.
And I think this is, still, I mean, I was in the African Development Bank with the President Kaberuka as his advisor, and we were having these conversations. I'm sure Vera also was having this kind of conversation with minister of finance. And really the, it's the obsession of a lot of ministers of finance is really the fiscal position of the country and being able really to respond to the, how do you call it? To the priorities of the country, as I said. So, I think the, we need, and particularly in fact this is, today is becoming more...urgent. because, in fact, you have the impact of the COVID-19 crisis in a lot of developing countries. You have also, in fact, the impact of the geo-economic situation with the war in in Ukraine. But also you have the change in the monetary policy of big central banks with an increase, in fact, of interest rate. And this was having an impact, in fact, on the African and a lot of developing countries' debt. So reducing the debt distress I think is priority number one to make sure that people will think about growth and will be able to think about growth. There is a lot of initiatives, in fact, are going here. There is the debate on channeling SDRs of the IMF. There is some progress made on this area, and I think we probably could ask for more. Also the cost of non-used money by the IMF, there is also some progress, but probably we could ask for more. So if you want people to concentrate on growth, let them reduce the energy they put on mobilizing resources, in fact, to ensure the macro or the fiscal position of the state.
This is one. Second, a lot of ideas highlighted by my colleagues are quite important. Probably the missing idea is the private sector. Despite, in fact, the difficulties and despite the challenges, despite... And this also including Arvind. In these countries where in fact the priority is the macro stability. But you have a lot of new sectors, new actors, new private sector in new areas, especially in the technology innovation, as Vera was mentioning, was becoming really a global player in a lot of areas. And this, I think, probably if the support should be given from donor community to this private sector to make sure that they continue despite the difficulties, despite the investment environment is not improving, but continue, in fact, sending hope to the new generation and to the people. Thank you very much. I saw that you started asking me to...
CHEMA TRIKI:
I'm conscious of time 'cause I promised 30 minutes of questions and response to the audience. And you all have talked about so many important things. Dr. Vera, the structural transformation, in other words, what you described, how much is lacking, the role of external actors or the non-role of external actors, the role of political settlement and elite bargain and how can potentially some external actors try to influence that. But I have follow-up questions but I don't wanna monopolize the conversation. I want everyone to feel involved in this. So we're gonna take a round of three questions to our panelists. So we have doctor and then from Mr Thomas from Malawi, is that correct? So I'm sure Stephanie you will have a question from him. Please go ahead.
SANTOSH MEHROTRA:
My name is Santosh Mehrotra. I spent about eight years with the Government of India before Arvind was with government. Then I returned to full time academia as professor in JNU, and then I'm now currently visiting professor at the University of Bath. I mean, let me just say that I completely endorse what Arvind was saying. However, having said that, I have a feeling... I mean, let's just remember that your two previous speakers had Africa mostly in mind, where the growth rate has been slow ever since the global economic crisis. You and I are 100% on the same page. Having said that, we have to ask the question that, is the real issue that growth is not fast enough, or is it that the pattern of growth is not appropriate for a sustainable growth path? Because it's true that speed of growth is very important because in countries where the demographic dividend is running out, we will actually begin to hit the middle-income trap, and it's absolutely critical that we worry about both speed of growth as well as the pattern of growth.
There are other countries where the dividend is not running out, I think we know the difference. So to my mind, there are two issues on the pattern of growth which in a sense have not really come out so far in the discussions. One is really in some ways what this conference is about, which is structural change. How do we ensure that structural change happens? And that's what's going to ensure that growth is sustained. I mean, Arvind is absolutely right that both Bhagwati and Sen are partially correct. But they're not fully taking into account the balance between the impact on the focus on growth and the pattern of growth. And there I would like to emphasize, for instance, from India. I mean, the southern states have grown much faster over a 30 year period compared to the northern states. And the reason for that, I would argue, is that they've emphasized on human development and their growth path has been inclusive. So the market size has expanded. That's not quite the case in the North, that's a real problem.
So we should be talking about the pattern of growth, and that's really the way forward. And in that, Arvind is right, outsiders have precious little role other than deciding where are the patterns of growth and the government is ripe to take foreign advice. Thank you.
CHEMA TRIKI:
So thank you for that. It was more commentary, but we can have our panelists respond to that. I think Mr. Thomas from Malawi.
THOMAS MUNTHALI:
Thank you so much, moderator. And Stefan, thanks so much. I want to promise you that Malawi will be more than Singapore soon, and we invite you when that happens. But no, I think this is very thought-provoking. Just two key points. The first is the... And I want to agree with Arvind, countries like Malawi, the issue of growth...
SPEAKER:
You will or won't.
THOMAS MUNTHALI:
Sorry.
SPEAKER:
You will agree or not agreeing?
THOMAS MUNTHALI:
I'm agreeing.
SPEAKER:
I'm agreeing, OK.
THOMAS MUNTHALI:
Countries like Malawi, I think growth we do recognize is very important. I mean, there's no question about it. The issue we are grappling with is why is it not happening. And I think for us, two elements that we've seen, I hate the National Planning Commission in Malawi. And one of the key elements that I've noted is that we... And I would want to get a reaction from the panel about the role of a developmental state, what's the role of the state to come in when market failures are existing? We have for a long time hoped that the private sector will grow and activate the productive sectors like manufacturing and others but that's not happening. And we've suggested oftentimes on a developmental state where countries like ourselves have come up with the Malawi Development Corporation. But when we engage with the IMF, they tell us you can't do that. And you have to just make sure that you create an environment where the private sector can come in and invest. So we keep on waiting, that private sector doesn't come.
What's the role of a developmental state and has this really helped elsewhere? Second is the point of accountability. You see the challenge that we have in countries like Malawi, we are not short of policies and plans and ideas. We know what we want to do, but oftentimes there's a lot of short-termism in terms of those that are leading us because of changing offices every five years. The wish is to look at things that can be seen having impact at the short term. So the preoccupation is about how do we get the next vote. Growth is a long-term project, and oftentimes they litigate issues of economic infrastructure and stuff like that. Now holding each other accountable, how do we build in countries accountability systems that can be enforced so that even the public servants are able to deliver regardless of the change in political regimes? Those are the two points I wanted to bring. Thank you.
CHEMA TRIKI:
Thank you so much. Maybe another, we'll go there and then I'll come to you next, and then we'll have our panelists reflecting on these points.
OLIVER KIM:
Hi, I'm Oliver Kim, I'm with Open Philanthropy. Recently finished my PhD at Berkeley. I guess as everyone in this room is aware, East Asia got rich on a model of export-oriented manufacturing growth. Recently, Danny Roderick and Joseph Stiglitz, among others, have articulated a thesis that this path might be closed off, that this common route up the developmental ladder might no longer be possible for rapid convergence. I was just wondering the group's reactions to this thesis is this model sort of closed off?
CHEMA TRIKI:
Great. Thank you. We'll have a reflection on these questions/commentary and then we'll come for a second round of questions. Is that OK?
ARADHNA AGGARWHAL:
Well, actually, my question (INAUDIBLE).
CHEMA TRIKI:
OK, then let's have the mic here.
ARADHNA AGGARWHAL:
Yeah. My question is like why is growth slowing down prematurely in many countries? These countries grew very fast in the beginning, but now they are slowing down and many of them are in the middle-income trap. Very few countries have actually crossed the threshold of high-level income. So I just want to know from the panelists, what do they think about how high growth rate could not be sustained? Is it only due to this population dividend or there are other structural factors that are responsible. Thank you.
CHEMA TRIKI:
Thank you for that. Well, we'll go, I guess, in the same order to answer some of the... I guess most of the actually were commentaries but (CROSSTALK).
STEFAN DERCON:
And they relate to each other and I can't help it, and I'm going to take 30s. There has to be some disagreement. We all agree with him, that's no good. But real quick, the way I would look at it, sustaining growth is actually hard. So I don't think it's getting a bit of growth going. I wish some countries tried a bit harder, but getting a bit going is not so hard but sustaining is hard. And I think it's a lot to do. In my reading is that growth and development means change. And you create new groups that have power and influence and they want the status quo. And so at some point, you could have a Bangladesh garment sector that is initially not that captured politically, but then becomes politically incredibly powerful in its politics. And they wanted to keep it like this while you need to actually go to other exports and so on. And it just has an example. It's like it's not so easy. And I think a lot of very few countries, even if you were to look at China, even though we didn't see it, went to quite a lot of shocks and changes within the party having to rethink how they were doing growth.
So sustaining it is actually the hard thing. And I think it comes back to an element of political economy. And it links a bit like... And Thomas, your point, I very much appreciate it, but I think your two questions are so closely related, I can't help emphasizing it. Why don't think Malawi can be a developmental state because you don't seem to be able to have a sustained coalition of growth going within your local political economy. And if you don't have it, you have a problem of accountability. You have actually not a strong enough state with an underlying deep commitment from all the different people and even the groups of people there. I mean, I'm not saying that you never could do it, but there is that thing. And it shortens the horizon so much because actually the commitment is not very strong, it's a short political cycle and we can't overcome that. And I think that I find that very hard and it comes often to the central point of it. I think the pessimism of some depth to your question on the export is slightly premature as well.
There's a lot of premature stuff, but there's a prematureness as well. I find, for example, there's an incredible opportunity inside Asia happening with firms wanting to move out of China. Western firms, Chinese firms, wanting to move out. And this is a massive growth market still happening. I think this is probably the one continent where the export-oriented growth model could still have some traction for a while, but maybe Arvind wants... I was going to disagree with you for a second. You just do that, it's really good.
CHEMA TRIKI:
He was waiting for it.
STEFAN DERCON:
Yeah, exactly. Rule of outsiders. No, it's the role of outsiders. Actually, it's not the deep disagreement. And thank you, Sandra, to actually emphasize this point is that I'm very much interested in the places where this growth is not happening. And India, you get on with it. And so to speak, get on with it or whatever. But in the the places in the Pakistans or the Nigerias, the DRCs is to ask that question, why can't we get this going? And just a simple point is actually the role of outsiders. And it's just a fascinating experience I had, I didn't expect this in Pakistan, is that the ideas of the structural reforms they had to take have been around forever. The academics, the think tanks, they've all been saying it. But when there was a bit of a window of opportunity that we thought, so first of all, the World Bank said we can't engage with it, it's too political. Now, the Prime Minister wants to set a growth agenda and say, oh, it's too political, we can't get engaged with it. But interesting local academics felt it too risky to be there because the politics is still so fragile.
It's a really interesting thing in Pakistan, I began to say, that I'm dispensable. If I can't get back into the country at the end of August, it's fine. And there's actually a role there in these tricky places that you can actually be the indispensable force that you can do certain things that actually is harder. Otherwise, you can give some comfort to the local ideas. You can give second opinions. I think there's a role there, actually. It's small, but it's actually it's interesting. I know Rachel has left but when she was at DFID, she started talking about best buys and all these things. But at least there was a real recognition of megabytes. If you could get a bit of economic reform, the returns are very high. And I think that comes back to what you actually were saying. These things are not that expensive, but the potential return, if it works, we may have totally failed in Pakistan. I don't mind the next one at some point locally it can begin to pay off, and at some point you get some of these things.
And so I think there is something about being willing to do it. I should stop.
CHEMA TRIKI:
Thank you much. Dr. Vera.
VERA SONGWE:
No, thank you. So I think to your question, we are probably living in the most developmental state that we have seen in a very long time, here. We just saw the IRA, $369 billion. The CHIPS Act, $400 billion. The Global Infrastructure Program, I don't know how many billion dollars. Huge (UNKNOWN) to wipe away the debt with inflation. Huge subsidy programs to businesses to continue to survive. The United States has been a developmental state. So I think in some sense that's not the question, it's the desire to transform the United States from the productive machine that it used to be into a new innovation machine allowed them to do this. I was just doing a report now for the G20 under President Lula, and I realized that the BNDES, the Brazilian National Development Bank, has actually done more renewable energy projects than any multilateral institution in the world. That's the power of a development institution that knows what it wants, that understands where it wants to go to and how it can get there.
And I think in some sense, it's no surprise that... Because they used a lot of local currency financing and so it became much cheaper. And essentially, what precisely the point. And a lot of the solar projects that we finance as multilateral institutions, they finance them, not one. We spend so much time trying to de-risk them, find local, find this and find that. Project development is done by BNDES, financing is done by the Brazilian real. The owners and the consumers of that development are paying in real, and so they're actually making 18 to 20% returns.
SPEAKER:
BNDS?
VERA SONGWE:
BNDES it is called. So the question around, can we do... And we talk about Singapore. Singapore has Temasek which is essentially also was the engine of financing and underwriting a lot of the development. In Singapore today, Temasek is building the houses, the homes for the middle-income Singaporeans who cannot afford it. It is being subsidized through Temasek, and we don't have that story being told. So I think there is also a little bit this disconnect with what we ask, emerging market countries to do and what we do in the advanced world. And the more we are able to sort of with some humility, say, let's maybe work towards these objectives, I think we will be able to get there much faster. Now, I'm still a believer that trade is a huge part of the engine for growth. And you're very right, essentially China. Mexico is now the next booming development area, as is Vietnam, by the way, slightly higher than India. Because what is happening is the Chinese are moving into Vietnam and into Mexico so that they can come into the United States.
And what we are seeing is huge booms in Mexico and Vietnam and Morocco, that are delivering on this growth. And my sense is that if we could make sure that the WTO was a much more powerful institution and we could get less. We have, as we speak today, the largest number of trade barriers put by the advanced world on the rest of the world, 700. So when we talk about growth and what is holding growth and whether we want to grow, yes we do. But it's very difficult in this new geopolitical environment. And so even if you were hitting these countries that wanted to grow, we have a geopolitical environment that is slightly more difficult. Hence we need to maybe begin to look at middle powers, and can middle powers get together and trade more and grow together? And then I want to leave one last point - Zambia, Botswana. $500 GDP per capita, 1960. Botswana is now at 8,000. Zambia is at 800. Leadership matters.
CHEMA TRIKI:
Absolutely. And in the case of Botswana, it was the use of minerals and natural resources for education and health. So much could have been done in terms of structural transformation in Botswana. But I wanted to, maybe Dr. Arvind and (INAUDIBLE) if you had any reflection points.
ARVIND SUBRAMANIAN:
Yeah. I'm gonna just address to a lot of it has been said here, maybe three. One is that I want to make the distinction exactly that Dr. Thomas, you said that there are places that have grown and have not grown. I mean, that we can examine why. But the argument that it's because some have deprioritized growth and others haven't, that's what I take objection to. I think everyone wants growth. Some have been more successful, some have been unsuccessful, and all of you want to jump to the conclusion that because they were unsuccessful, therefore they didn't try, that they deprioritized this. I mean, that's not right. So everyone is trying. Some are more successful and some are not, maybe other concerns like macro stability etc, which they have to address. So that's the distinction that I was trying to draw. But it is true that in the intellectual community, academic community, development, finance, philanthropy, you've deprioritized and that's your problem, not ours. So the second point is the Roderick Stiglitz question.
Look my good friend Rohit Lamba is here. So let me just maybe at the risk of... See, there are three views on trade-led strategies for growth. I mean, in the old structural transformation tradition. One is what Rohit has written with Raghu which says that India is good in services, it should prioritize services. I'm sorry if I'm being very reductive, Rohit, outside you can come and say, boss, you're talking rubbish. He's also my co-author and friend. The second view is the... So this is the Lumba Rajan view is tradable services. This Roderick Stiglitz view is non-tradable services pretty much. My view... I mean, I'm exaggerating Nancy, it's broadly that's the case. Because I know I've spoken about this with Dany. And he admits that this is a strategy where overall growth will be lower because it's going to be broadly non-tradable services. And the third view which I think Stefan and I, and I wanna support what Stefan says, is that no, there's still a window for traditional export-led growth.
And the argument is very much, if you just look at it in crude zero-sum terms, I mean, just to give you an example, China's share of the global apparel exports peaked at about 45, it's now 35. And that has to go down over x years.
CHEMA TRIKI:
And it has been going down.
ARVIND SUBRAMANIAN:
But it has only gone down about 8 or 9 percentage points. But it can go much further down and there's no reason why Morocco, Zambia, etc, should... So even if the world as a whole says we will only allow so many exports from developing countries, there's still a window for others. And the example that I give is actually it's happening in one state in India, in my state, in India, Tamil Nadu. That's exactly what's happening. We're getting this investments in, we'll talk about that. So I think the problem with the Lumba Rajan view is that it's not going to be inclusive because it's high-skill intensive so it's going to be limited. The problem with the Roderick view is that I've never seen a non-tradable services strategy. And it's going to have... And it's not as if... So we still want the tradable but admittedly, the window is narrow. And also labor displacing technologies are going to make the window narrower still. The last point I want to say is that it relates to the middle-income trap and the growth and change point.
I have a slightly different view. I think that growth is, of course, it produces change, but growth also creates the momentum for more growth. I hate to sound narrow academic about this. In the data, middle-income countries have grown the fastest. When Justin Dev Patel and I first wrote this, Paul Krugman actually commenting on our blog said this is a great example of growth sustaining growth because this learning by doing. You stop doing stupid. It's like, at least stop doing stupid shit, Obama's foreign policy. So therefore, I think the notion that growth produces change and therefore sustaining growth is very hard. I think there is at least a counter to that which says that actually the data shows, firstly, middle income countries, because there is something about growth sustaining growth which we should not neglect.
CHEMA TRIKI:
Thank you so much. Dr. Hakim in 30s, our time is running.
HAKIM BEN HAMMOUDA:
I'll take two... I mean, very quickly, I think what Stefan was saying about this alliance, Pro-Growth Alliance is quite important. And this is sometimes very difficult because of political instability. And when you talk to your prime minister about long-term growth, he will tell you, my friend, I'm not sure that you will be here next month. So please make sure that the salary bill is paid at the end of the month, and then we'll do whatever we want on growth. I think Growth Alliance I think is an important one. Second, just to comment what Vera was saying about national investment funds and what BNDES was doing and Temasek was also doing, I think this is really because almost all our countries have their own. In Tunisia, we were able to create one in 2011 after revolution. I mean, he was managing almost all the savings of the government, what he was doing, he was just buying coupons of the government and that's it. When I was the head of the board of this, I tried to explain this is not how to call the purpose and this is not the objective of.
And we brought, in fact, a lot national investment funds to explain to them that growth is really the priority of this fund. So lastly, last thing, I think what Vera and all the colleagues and Arvind was saying, and probably one of the recommendation to this work is really sharing experiences. I think what Vera was saying on BNDES and what also we're saying, and you cannot imagine that these people they don't know what is going on, including in Morocco or the Tunisian don't know what is going on. So I think this platform for sharing experiences about best practices to push growth is key. Thank you.
CHEMA TRIKI:
Thank you so much to the four of you.
VERA SONGWE:
I just wanted to say that we say a lot about Nigeria, but there was a period when Nigeria was growing at 7%.
SPEAKER:
Brief. Very brief.
VERA SONGWE:
Let's just put that on record.
CHEMA TRIKI:
A round of applause to our panelists. (APPLAUSE). We're gonna have 30 minutes of break. So we're gonna step aside and have a coffee break and then come back in 30 minutes. Thank you so much. (UPBEAT MUSIC).
- Stefan Dercon, Professor of Economic Policy at Oxford University and former Chief Economist of DFID
- Arvind Subramanian, Distinguished Non-Resident Fellow at CGD and former Chief Economic Advisor to the Government of India
- Dr Vera Songwe, Chair and Founder, Liquidity and Sustainability Facility, and Non Resident Senior Fellow, Global Economy and Development, Brookings
- Hakim Ben Hammouda, Former Minister of Economy and Finance, Tunisia
-
Moderator
- Chema Triki, Managing Director, Growth Teams
Coffee Break
3:30 – 4:00pm EDT
Evidence-Based Action for Growth
4:00 – 5:15 pm EDT
MARK PLANT:
Good afternoon. If you could take your seats and quiet down. We'll start our next panel. My name is Mark Plant. I'm a policy fellow here at the Center for Global Development, and I'm pleased to introduce this panel on evidence-based action for growth. And the moderator is Shruti Rajagopalan from George Mason University. Shruti, I turn the floor over to you and I'll try to quiet the crowd outside. Just go ahead.
SHRUTI RAJAGOPALAN:
Excellent. Thank you so much for being here. It's a pleasure to be here. Thanks to everyone at CDG Growth Teams, Charter Cities Institute, all our colleagues here. It's really, really wonderful to be here. Today we're gonna talk about evidence-based action when it comes to growth. And I have really a stellar panel. I have Eliana Carranza, who's an economist and is the global lead for labor and skills at the Social Protection Unit at the bank. I have Amir Lebdioui, who is the associate professor of political economy of development and the director of the Technology and Industrialization for Development at Oxford. I have Ken Opalo, who is the associate professor at the Edmund Walsh School of Foreign Service at Georgetown. He's also a faculty member of the African Studies Program and writes one of my favorite substacks, which is the Africanist perspective. We have Kunal Sen, who is an economist and currently serving as the director of UNU-WIDER. And he is currently on leave from the Global Development Institute at the University of Manchester, where he's a Professor of Development Economics and has written some of my favorite books on economic growth episodes in India, informal markets post reform periods, and, you know.
So I'm very, very excited to kick off this conversation. Before we get into your long remarks, I just wanna hear a hot take from each of you. And I'd like to start with, in your perspective, which policies have proven most effective in driving or spurring economic growth and which ones haven't, or worse, still have hindered growth?
ELIANA CARRANZA:
OK.
SHRUTI RAJAGOPALAN:
I told you this is a good one.
ELIANA CARRANZA:
I believe that we understand much better what doesn't work for growth than what works for growth, in part because also, you know, there is a bit of complexity when we think about what are the policies that are suitable for different countries in different stages of development, they have different institutional capacity and they have like different economic environments, right. So the answer has to be very, very nuanced. But I would say that in general, we have learned that, um, anything that is market-friendly and business-friendly, trade policy investment are kind of like the pillars, right? And in terms of what we know doesn't work, the list is much, much longer, right? Like protectionism, overregulation of markets, price controls, subsidies that do not have an exit strategy, poorly targeted programs. And it can go on. Right.
KUNAL SEN:
Yeah.
KEN OPOLO:
First of all, thank you for having me here today. I'll disagree a little bit in the spirit of disagreement on the panel by saying that I think in terms of what works, the things that I've seen to work best are policies that have specific beneficiaries in mind so that you have policy coalitions that can then sustain the reform drive or policy initiative. So (CLEARS THROAT), if you're trying to make pro-business policies, right, what specific sectors are you trying to promote, and specifically what leading firms are you trying to promote? Because then they'll tell you that actually your tariff is too high or too low. So you'll have a feedback mechanism with an actual sector or firm, set of firms that can give you feedback for improvement. But if all you're doing is improving your business environment in the abstract without anyone in mind, then you'll have the Malawi problem that we heard about, which is you make all these nice reforms, but the private sector doesn't show up because there's no private sector to think about.
So maybe thinking about where states can come in to help catalyze these demanders of good policy so that we don't only see this problem as a problem of supply, of good policy, but also making sure that we have enough demand coalitions that can then sustain the growth process once we've jumpstarted it.
SHRUTI RAJAGOPALAN:
Kunal.
KUNAL SEN:
So I think, in part I'm gonna overlap with Ken, actually, because I think what does not work. And I think it's pretty clear the evidence on this one has to say, even though it's still promoted quite a bit in discussions on growth, is essentially Big Bang investment climate reforms. Trying to do everything, trying to strip down regulation, hoping that if the country moves from ease of doing business from whatever 15th rank to 30th rank, it's gonna make a big difference to growth doesn't work. So that's pretty much what doesn't work, even though that's still exactly often what we hear policymakers have to listen to from many others that that's what you're gonna do to get to get your ease of doing business ranking down, if you can. What works? Exactly the opposite. You've got to essentially create a microclimate of deals between economic actors, firms, and political edits, which are kind of, sort of you create this microclimate where the right deals are given to the right kind of firms, right.
You find the right firms, tradable services, whatever it is, and create that microclimate and more sectoral-targeted government policies. This is not industrial policy, not industrial policy. It's not industrial policy because you've got weak state capacity. So, states cannot essentially monitor performance here. But it's so it's not industrial policy. They wanna be careful about that. But it is a kind of industrial policy. Right. That works. And we have many examples of why that has worked.
AMIR LEBDIOUI:
So, if you ask what policy works, the one that I would choose would be the one that my good friend (UNKNOWN) over there used to call the policy that shall not be named. That, thankfully, is not the case anymore. So we can say it openly, industrial policy, but with a caveat. Industrial policy with a high tolerance for failure. Alright. And in fact, this morning, or actually earlier in the session, Mike Tyson was mentioned in the introduction session and even Mike Tyson lost some games. So the whole point here is that there is a great process of learning by doing, even institutionally, right, in terms of trying things, seeing what doesn't work, adapting it over time. And this is something that has often been lost in kind of appreciating what goes for growth, right? There might be many things that don't work, and it's that learning that gets us there. And I hope that Lant talks about isomorphic mimicry in his next session, because in terms of recipes, I think commonality between countries that have grown is exactly.
This actually is actually trying things that don't work, but actually adapting it over time to the local context. And if you don't actually try it, you'll never learn. Right. You'll never know how to actually get there. So, this is perhaps my take on growth that might be similar to what a life coach advice might be. Yeah.
SHRUTI RAJAGOPALAN:
No, this was great. Now, I just want to dig in a little bit more into some of your research. So Eliana, recently in your Journal of Economics perspective piece with (UNKNOWN), you've talked about government training programs, sort of reducing market frictions, job skilling, job search and matching and how these sorts of government policies have limited effectiveness. But a very large part of the structural transformation problem that most developing countries face is exactly that churn in the labor market and how to increase wages. So, is there a role for any policy? Is it just that they're implementing the wrong policies. Is there a right one or this is just part of one of those policies that they must do because they're democratic countries. And then actually something else ends up working altogether.
ELIANA CARRANZA:
No, I understand. And I don't want my words to be taken out of context. So, I want to start by saying that I believe that, you know, like economic growth is key for job creation. And in many countries it's still the main constraint to job creation. But there are, like many other countries where even when they have economic growth, they are not producing enough jobs for the rate of growth that they are exhibiting. And here what we are starting to understand is that it's not only that growth matters, but how that growth occurs. What are the type of transformations that happen on the background of it, matter for job creation, right? Like we are talking about transformations along a spatial dimension, sectoral dimension, occupational dimension and even organizational dimension on how firms work. And that is where we see the space for microeconomic policy both on the supply and demand side, such as industrial policy that has been mentioned here, but also these type of training programs and labor market intermediation programs to enable the type of transitions that will lead to the structural transformation processes that we know are more conducive to create jobs.
Right. And we know, for example, that that's the difference between what we observe when we look at Korea or Indonesia or India. And that each, 1% of GDP growth like they have created more or less jobs, particularly low-skilled jobs. So, I would say that what we are trying to convey in this study then, is that it's in that context where we have to think what is the appropriate role for these type of policies. And not only the appropriate role and space for these type of policies but the appropriate role for the public sector or the private sector in providing many of these, if you want enabling services, right, like the skilling of the workforce, the connecting employers with workers, et cetera. And. So, I do think that for me, one of the most interesting things to come across when we were preparing this review, it was a. It was really not a. It's not a meta-analysis, it's an expert opinion piece. And it was how we have perfected the tools that we use to intervene in the labor market on the supply side.
So we have tools that are becoming increasingly effective, increasingly even cost-effective, And yet still the challenge is scaling up their impacts. Right. And so, much of the reflection that went into this piece is what is limiting the scaling up, if we know what works. Right. And part of the answer is that we. It's not only about the tool, it's about how we package this tool together with other interventions in order to achieve certain type of labor market outcomes. Right. So, we do need approaches that are more comprehensive. And oftentimes that require coordinated cross-sectoral policies. And that's part of the challenge. The other part of the challenge is that, as some of our panelists have mentioned, the policies that are the most effective are the policies that are tailored. Like with labor market approaches, it's not like giving a pill and the same pill to everybody. Oftentimes the approaches, the solutions that are developed, particularly at the small scale, by private sector, by NGOs, are solutions that have been tailored to a specific type of sector, to a specific profile of worker in a specific area.
And that is why they are able to be highly effective. So the challenge then, when you try to scale up these approaches is that it's not only about increasing the coverage of the programs, but you are also increasing the heterogeneity of beneficiaries that you are trying to reach with the same policy. And actually, in the context of labor markets, if we want to maintain a certain level of effectiveness at a larger scale, what we need to do is both to increase the numbers but at the same time maintaining this tailoring approach. And that requires very sophisticated delivery systems, very complex delivery systems that allow you to expand while at the same time profiling different types of participants and giving them the type of support that they need. Yeah. So, I do see that on the technical space, in the innovation space, there is a lot of micro evidence that is really exciting. But now the challenge is scaling up and building systems to approach this problem because right now the solutions that have been quite successful are boutique solutions.
SHRUTI RAJAGOPALAN:
Can you give some examples of that? The kinds of solutions that have been successful and could potentially be scaled.
ELIANA CARRANZA:
So, let me tell you so that you understand a bit the disconnect that sometimes there is between these very exciting micro evidence and where the challenges are. Right. For me, we know that in these countries, entrepreneurship is, and self-employment is one of the dominant activities of the labor force. Right. And in this space, there are like several interventions that are trying to give people business training with mixed success, et cetera.. Very recently, some of the most exciting work that has emerged is some sort of interventions that are more like giving people soft skills. OK. And the entrepreneurs, they are giving them soft skills. This with the idea that in developing countries, many of these entrepreneurs are entrepreneurs due to push factors as opposed to pull factors, which means that the unobservable characteristics are not the ones of a typical entrepreneur in a first-world country. OK. And then, you have to reinforce this type of more entrepreneurial mindset or attitudes in this population.
The results have been beautiful. Probably is one of the most encouraging pieces of research in terms of impacts of soft skills training on entrepreneurial outcomes. Oftentimes much better than business training. Much better even than capital injections, et cetera. But can you imagine a national policy that only emphasizes that feature? So. And here is where, yeah, we need to think about granularity and complexity and et cetera.
SHRUTI RAJAGOPALAN:
Yeah. This actually. I mean, there's a lot of overlap. Some of the questions on female labor force participation, and entrepreneurship that both of you worked on. But can I have a slightly different question for you? I wanna actually go to one of my favorite pieces you've written, which is titled; Two Unsolicited Ideas on How to Invest Some of Melinda French Gates 12.5 Billion on Substack. So, this is a really lovely essay by you. And one of the things that struck me the most is you talk about how little innovation there has been in international development in the community and how we just need more experimentation. A lot of it needs to be more focused on the private sector and so on. So, can you first lay out the argument there, and then if you were the czar of that international development community and the Gates Foundation, what would you do? How would you allocate the funds?
KEN OPOLO:
So yeah, I think the piece was partially motivated by. I'm working on a project trying to look at Kenya's changing approaches to development policy over time. And what's clear is that in the development community, there are those of us who are academics or development practitioners who don't interface much with the private sector. And so, what we do is not private sector-oriented. And I see this in my master's classes all the time. When I survey the students, they rarely mention the private sector. And so, I tried to prod them to think about the private sector as the driver of development. Right. And so, you would imagine that philanthropists, many of whom make their money in the private sector, would be the ones who, when they show up in the field of development, should be trying to reproduce many Bill Gates in the tropics. Right. As it were. But we're not seeing that. Right. They are coming in, and they want to be the World Bank and to do the same sort of things that the traditional development outfits do.
And I think that's sort of an interesting approach. Right. They have the entrepreneurial spirit. Right. So that you'd imagine that they would be interfacing with fellow successful business people in the developing world and helping them scale up. Right. Instead of trying to give micro-loans for unemployed, low-income women to start their own businesses. Right. So that was the puzzle. Right. And the challenge here should be that those who do business and understand the private sector should be interfacing with the private sector on the other side, instead of putting on a straitjacket of wanting to only do that through the paradigm of international development, because then they would be free to innovate. Right. Instead of pretending that they know nothing about how business works. Right. They could show up and say, “You have a small business with 50 employees, here are ways that I can help you get to 500 employees." Right. And I'm gonna try and replicate some of the things I've done in my own economy because I understand how the private sector works.
Maybe the manufacturers' association in Tanzania is not as well organized. Right. Here's the way we've done it in my country. Here's how you can get organized demand. And maybe I can use my influence as a Gates foundation to ensure that the government listens to your demand as the manufacturers' association in a developing country context. And so, I think that's where the innovation ought to be coming from. Right. Instead of forgetting all the business experience and knowledge and coming in to hire academics who've never run a business to go study how to succeed at this. Right. There's. I think there's a lot that we're leaving on the table by adopting this approach, in my view.
SHRUTI RAJAGOPALAN:
Yeah. Academics. Actually, international development should be merged with the business school. I think they also get paid better. So maybe we can get a coalition going for that. Another Substack of yours, which I really found fantastic, is you're talking about how development policy at the national level oftentimes has, I mean, this is where the politics really kicks in. Right. And especially at lower stages of development, there isn't enough to compensate those who may be preventing these reforms or transitions. And your focus in that piece was on urbanization, I think in Nigeria particularly. And how. As I second with, I don't even like using the word second best. But how focusing on urbanization and maybe getting one or two cities to really become the engines of development may be the way to go. How would you fit that in with the private sector idea? I feel like there's a lot of complementarity, but I haven't quite figured out how to put them together.
KEN OPOLO:
Yeah. So, yeah. In the piece, right, the idea there is the learning by doing sort of story and perhaps also it reflects a bit of my frustrations with how we've conceptualized the institutions literature. Right. You know, the idea that you get perfect so you can grow, that's not how things have worked in history. You know, you get perfect as you go on the institutional front. So, if Nigeria can't be good at national level policy making, right, you know, the second best thing, if I may use that phrasing, right, could be to try and decentralize this sort of public service at the city level and have, you know, policies that create cities almost as, their own autonomous units that can help one produce the right kind of urbanization. That's not just, you know, dense ruralization, if I can say that term, which I think is a problem for many African countries, right? The cities don't look and feel like cities because they're not well organized. And so we're not getting the benefits of urbanization that other regions or other cities in Africa have seen in the past. So that could be one sort of benefit. And the other benefit would be to allow the cities, right, to cater to their own local private sectors, right?
So that you have this symbiotic relationship between the public sector and the private sector in a more localized setting, so that if you're doing, you know, grain or whatever in the middle belt in Nigeria, you have your own policy as opposed to the cities in the southeast that care more about, you know, light manufacturing or Lagos with their financial services, right? So you can decentralize the public sector, if you will, in this fashion without, you know, dragging everything back, because you also have to worry about the rural sector, which is a big problem for the federal government and the state governments in Nigeria.
SHRUTI RAJAGOPALAN:
Yeah, Kunal. So, I mean, I've really it was hardest for me to ask you the question because I've read so much of your work on the episodes of, you know, the different episodes of India's growth story. But the one thing I really wanna learn from you about is when it comes to structural transformation, politics really matters. And, you know, so usually we're talking at the level of development policy, right?
But development policy is informed by politics of that particular context or that particular country or city or whatever it may be. Can you talk a little bit about how politics plays a role in structural transformation, and maybe how some of the more recent, you know, country examples are a little bit different from what happened maybe 40, 50 years ago in the case of the Asian Tigers?
KUNAL SEN:
Yeah I mean, that's really important because we talked in the morning about, you know, globalization infrastructure, et cetera. Which are all very important, obviously these are enabling factors, right? You can't really have growth if you don't have infrastructure, and if you don't open up the world markets. But I think the point is, and I think that this work that we did also with land is that, underlying all of that is the politics, right? And again, when you think about growth, we need to be careful that growth has sort of two parts to it, right? There's one part which is getting the growth started, acceleration of growth.
And then the part that OK you got growth started, how do you maintain growth? What we know is many countries get growth started, and that growth is not maintained. So we have the growth spurts, there's boom and bust growth and growth simply collapses. Right, that's like one of the most, I think clear satisfaction of economic growth we know now that work we did that and I did many years back. But then the question OK, so why is it that very few countries they get growth started, but they can't maintain growth? What's the problem here? I mean, you got your investment going, you got some growth going, you know, maybe a little bit of productivity increases, but then you just can't maintain growth. And that's where the politics comes in, right? So, generally the way one can think about how growth gets started in a fairly simple kind of formulation is some political elites find some business actors and say, look guys, you want to invest? I'm going to make sure that you're going to get the greater deals that you need and growth gets started.
Bad institutions, you know, business regulation, nothing. All of that is not gonna be there, right? In those kind of contexts and get growth, get started. Some people get this kind of deals and they start some investment and then that happens. But then the next big step is so that's what we call closed deals, which are offered to only particular agents or enterprises in the economy. And these are ordered because the political elites are said to the economic actors, you know, we're gonna look after you, don't worry about it. You know, we are around here to look after you as long as you manage to make some investments. But then the next stage is OK, you got that going, but for growth to be maintained, you need structural transformation. You cannot have growth maintenance if you don't have structure transformation. And that means new actors, new firms, new entrants, and also perhaps some incumbents who need to get out because it's simply not productive anymore. And that movement from starting off with a few firms that political elites are favoring to opening up the deal space to a lot more firms, so opening up the deal space into new entrants, maybe tradable firms, maybe manufacturing and so on is a difficult part.
Why? Because once you got this rent seeking arrangement with a few firms, you wanna maintain that you're getting your rents. Why would you want to disturb it from both sides? From both enterprises were getting this rents, corruption, cronyism, whatever and from the political side. So it's kind of difficult to actually open up the deal space. And so that transition is a very difficult transition. And the work we did on this shows that in many countries, growth started with that transition to open deals. Opening up the deal space was very difficult. A couple of country examples. So, the work we did we found Rwanda and Bangladesh will give two examples. Rwanda is a very different political context, at least in that time we were working on this Rwanda dominant political settlement as still now. And in that kind of Rwanda story, the political leaders favored few coffee producers, saw some potential there, provided the deals. And Rwanda, as we know, has seen growth and structural transformation in a limited way, but still substantial transformation.
So there was the Rwanda story. In Bangladesh, what you had was two competing elites. Both are jockeying for power. And of course, until one set of elites decided to keep the power to themselves until recently. But both sets of elites, as far as we could see, were we're offering the same kind of deals to the ready-made garment sector. So whether the one set of elites went off and somebody else came in, the ready-made gun set to new, it didn't really matter. We will get our deal, so we're gonna make sure we're gonna get what we wanted, and we will be protected. And of course, Bangladesh is an example of a country which had growth with some semblance of sexual transformation. OK, at the end of the day, there was a limit to what you can achieve with with a ready-made garment sector driven strategy. But certainly Bangladesh certainly managed growth with such transformation. So both in both examples, very different political contexts, one very dominant, one set of elites, another competing elites jockeying for power, but similar outcomes and similar in the way that they handled that transition from very close deals, slightly for opening other deal space. So I think that's a really important thing to understand in how structural transformation happens.
SHRUTI RAJAGOPALAN:
To what extent does the momentum that comes from economic growth generates more revenue and, you know, also more rents in some sense, and allows the political elite to start buying out more of the incumbents or more people who are sort of, you know, maybe in agriculture or somewhere else who are resisting reforms in some sense, sort of solving the transitional gains trap. You need some money to go around, right? So, how does that transition work out? Because there are sectors in developing countries where you don't have these kind of entrenched incumbents, but there's still some friction in having reforms typically agriculture.
KUNAL SEN:
Well, you know, I mean I think it's a difficult one. So again let's stick to a country examples. Let's take Malaysia and Thailand, both have done actually pretty well. But they're still middle income countries and they haven't made the transition, the middle income trap as we obviously call it.
Now in those two countries, and you would have thought, OK, you know, Malaysia and Thailand, look what they're doing. They're getting all these electronics and everything going, what can stop them? Right, but something stopped them. And that is the politics, right? So in those two countries and simplifying the story a little bit, basically they could provide this open deals to the manufacturing sector, electronics auto ancillaries in Thailand and Malaysia electronics. But at the same time, they had a whole bunch of political elites. So they had to bunch of indigenous elites who they had to keep happy, or groups of very powerful conglomerates so that they had to keep happy in the coast of Thailand, powerful conglomerates in the case of of Malaysia, indigenous elites. And so you had to keep them happy, and they had to provide them cronyistic deals because you didn't want them to shake the political settlement. And that's the problem here, that even in those two countries with pretty high state capacity, with pretty good growth going even there, there was a point where they could not maintain it.
And then we know what happened, the East Asian financial crisis was not just an exogenous shock, it was very endogenously outcome of the politics, right? And since then, neither of these two countries have done very well, right? They haven't really gone back to where they were before. So it's a difficult one. I think that's the problem that of this transition is very difficult. There are other examples where the transition has been handled. South Korea of course is one key example there. But it is surprising that there are very few countries that even at different levels of economic development, the transition to what you said towards this more inclusive deals, you know, and opening up the space for new entrants, so on isn't really possible. And that, I do think, is to do with the politics.
SHRUTI RAJAGOPALAN:
Yeah, I wanna switch gears and go to Amir. Amir, so you know, conventional wisdom when it came to developing countries was the important thing is just to grow and industrialize, right? Don't worry too much about first world problems like climate change, don't worry too much about air pollution and other things.
And as countries get richer, you know, there is a demand for those sorts of, you know, clean air, clean water. And there are also you know, enough revenue generated to solve those problems, technology. And that's when you deal with it. And you sort of, you know, in some sense flip that on its head in that developing countries need to think about more climate friendly technologies, more sustainable technologies, because that's part of the package of what is preventing them from growing in the first place, right? How does this square, with your other view on trade protectionism also hampering, you know, developing countries or, you know, the inability to do industrial policy, which is also strongly linked with these kinds of, you know, clean climate technologies and everything that you're talking about. So what is a good way to think about all these different pieces together?
AMIR LEBDIOUI:
Thanks, actually, that book that, you know, you refer to, survival of the greenest, is published in the same series as Quinnell's, and there are two main arguments for reading our books.
One is that they're open access. Two, there are only 100 pages long, which means that you can read them and you don't waste time and you don't waste money, right? Which are very good arguments.
SHRUTI RAJAGOPALAN:
A lot of that, they're actually very good.
AMIR LEBDIOUI:
So it's an added benefit. (UNKNOWN) So let me start with a very pessimistic view, right? And the one is in terms of the climate agenda and how it impacts structural transformation. So there is, a perception that the climate agenda brings about a lot of benefits, right? For everyone, for growth. And in theory, it's true, and it's actually the main point of the work, right? To show that actually in many ways now the best or the most viable industrialization is green industrialization, given changing conditions, changing demand. But in practice, what you see is that those opportunities for green growth are being increasingly captured by already industrialized economies. And that's a real problem, right? Because the green growth agenda is not delivering growth where it's the most needed.
So if you look at jobs, which I think is, you know, earlier on what you work on, if you look at the manufacturing of low carbon technologies, if you look at green patents, they're consolidated even more so for than standard manufacturing in two three countries. For a lot of the opportunities for green utilization, whether it's, you know, energy intensive industries downstream, but also a lot of the tech, they hinge on the existence or access to cheap, reliable and clean energy. Now we're seeing record investment in renewables every year, right? Over $1 trillion. If we put it in per capita terms, that's about $180 per capita for North America, excluding Mexico. 140 for the EU, 120 for Japan. Guess what's the number for sub-Saharan Africa? (INAUDIBLE) Ten, who says better? So and this is the region where you have great potential for renewables. I think Vera mentioned this morning all the minerals you need. And and you still have 600 million people that still lack access to electricity. The number is $1 per capita, right?
$1 per capita. So under these conditions, the poorest are gonna be pushed even further behind, right? And clearly they're not getting the investments that they need to achieve that green structural transformation. And that's a real source of concern. So you know what they say, the pessimists complain about the direction of the wind. The optimists will hope that it changes. And the sailors tried to adjust their sail, right? And this is where industrial policy comes in, right? Because this is precisely a way to not see the climate agenda as a green window of opportunity, but seeing as well this is a wave that can be, appropriately leveraged to actually get to where you want to be. And that's the core of industrial policy, right? It's about changing the conditions, the incentive structure, to reorient flow of resources where they're the most needed or where they can have the most multiplier effects. So in terms of how to get there, I would like to focus about the issue of coordination that is needed at three levels, at the national level, at the regional level, and at the international level.
So at the national level, one thing that is really different about, well green growth strategy in general, but also the implementation of green industrial policy, is the amount of coordination you need across different types of ministries and actors, right? The examples that were also mentioned in the previous session of the East Asian Miracle. These are examples where industrial policy was the main mandate of the powerful Ministry of Industry and Trade. But with industrial policy, that is just not possible, right? Because for the first time, you really need key coordination with the Ministry of Energy as well. Because if you have a discrepancy between your energy policy and the industrial policy, you can't have a green industrial policy. The Ministry of Environment, because many countries actually use environmental regulations, not so much for the environment, but as a way to have a de facto import constraint, right? So, by the way, can you raise your hand if you think that bicycles are not environmentally friendly?
And can you raise your hand if you think that bicycles are environmentally friendly? OK, so that's pretty much everyone. Well guess what, the EU will disagree with you. And that's because they refuse to include bicycles in the Environmental Goods Agreement negotiations, because if they did so, they would have to remove tariffs on bicycles, and essentially the Italian bicycle industry would be wiped out by imports of cheaper and actually better bikes from China, right? So and actually (INAUDIBLE), it says it all. And actually this is one example. We could go with one hour on how environmental regulation historically are used as actually a form of protectionism, right? So that coordination is key within the government, right? And you see, for example, countries like Brazil, which have very high ambitions in terms of industrial policy. But at the moment you have this very weird situation where you have four different ministries with four different green industrial policy strategies, with some overlaps but also trade offs.
And this is where institutional learning by doing is really important, because the way that coordination happens really depends on each country. And in China, for example...
They basically completely eliminated the Ministry of Energy at some point because they realized that actually energy is a cross-ministerial issue. And so now it's an energy commission. I'm not saying that other developing countries should eliminate the Ministry of Energy, but the main lesson here is actually that process of institutional learning by doing saying what works, what doesn't, and adapting it to your local context as opposed to isomorphic mimicry and just importing solutions from somewhere else. And they don't necessarily work in your own context, but also in terms of the type of actors. Civil society historically has not been involved in industrial policy or growth discussions, but it has to be because a lot of trade or there's a different vested interest in this type of green transformation plans. And it's key for it to be sustainable and long-term that a variety of actors are involved, especially in democracies where governments change so often. The second aspect is at the regional level.
So something that is becoming even more obvious in the context of green transformation is the fact that I mean, now we see a lot of the successful cases. There are really big countries, including this one. There's a lot that you can do with demand side, you have the market scale. But what do you do if you're Togo, if you are Guatemala, if you are Suriname? You just don't have the same domestic market to make it happen. And this is where regional or multilateral coordination of industrialization is so important in many regions in Africa, Latin America. You have where the critical minerals are from where the proximity to trade routes, from where you have the manufacturing capacity to where we can actually produce renewables at lower cost there in different countries. So that work of coordinating industrial policies is so important. And actually Andrés Valenciano from ECLAC is doing a lot of that heavy lifting in Latin America. Now on the international coordination. That's a whole different dimension.
I think it was mentioned also earlier, Doctor Arvind had mentioned that there is the global common goods that you need to be able to achieve that kind of growth. And frankly, this is just not happening. And you see the conversations at a global level, both in terms of trade and finance. And this is not essentially leveling the playing field to enable industrial policy to take place. So, these are some of the ways in which the climate and development agenda could be united. But it requires governments to take a lot more proactive role and try things and might fail in the process, but essentially need to do to be able to define where they want to sail in the green agenda.
SHRUTI RAJAGOPALAN:
So there's some disagreement across the panel on industrial policy and whether it works, or at least some nuance that all of you can shed on it. So it's a two-parter, straight up, do you think industrial policy works or not? And, if yes, why yes. If not, why not? And the second part is, most of the successful cases we know of industrial policy, and there are few and far between. They worked in a world when there was very little protectionism, especially in the international order. So they all had to pass a market test. So even if you're picking winners and losers in each country, either sectorally or firms, or making deals with elites. Eventually you knew if they succeeded or failed only when they passed the global market contest. So in the current geopolitics, with as much protectionism as we have, and with the complete sort of collapse of the WTO, how will industrial policy work in this new world, if at all it worked in the old one, according to you. That's a simple one. In any order feel free to go ahead or we can go in the same order.
ELIANA CARRANZA:
I essentially believe that any policy that is well-designed and well-implemented will work. So this question of whether industrial policy works or not. It depends on.
SHRUTI RAJAGOPALAN:
Don't we decide that something is well-designed and well-implemented ex-post after it has worked?
ELIANA CARRANZA:
Yes. So that's a challenge. Yes.
KEN OPALO:
So I think the proof will be in the trying and learning by doing. And there's scope for regional trading communities to sort of provide the wider market test that may be needed. So if you're in Africa, you can think of ECOWAS in West Africa, which is a giant market. Nigeria with what they're trying to do with petroleum. Aliko Dangote finally established a refinery so that Nigeria doesn't have to export crude and import refined oil. Part of the deal is that he'll supply the Nigerian market but also sell to ECOWAS. So, it is he will have to compete with (UNKNOWN) in neighboring countries and other energy companies. So, you can play a regional game albeit with a limited market to start with. And then that can be a big enough pond to play in, to prove your capacity to perhaps then step up to the global stage. And then there's also scope for I know right now when we think about protectionism, we often very much think about the north-south sort of trade barriers. Well, I think there's still opportunity for south-south trade intensification, which I think will speed up as developing countries grow more.
India is massive. Brazil is massive. Africa is huge. No reason why if Europe and the US are putting up trade barriers, they shouldn't trade more with each other in their own currencies even as they're trying to these days.
KUNAL SEN:
So, I'm going to say no, but again, with some caveats, because if you look at the literature on industrial policy and it's come back again on this, is that there are people who believe that there should be no selective policies for any specific firms or sectors, industries, and believe that completely selections by themselves can lead to bad outcomes. And there are those who believe selection actually is pretty important, because how would you essentially get the right kind of firms to invest and get innovation and so on. And so that debate carries on and one can sort of take positions on this. And I don't really think there's any evidence either way. But I think the context is not so much industrial policy for the US as we were discussing earlier this morning. And or even a high-capacity states like maybe even India or Brazil. You're talking about the low-income, low-capacity states. In those kind of contexts with weak enforcement capacity of states. What exactly is industrial policy?
If it is essentially enforcement of particular rules and you provide a subsidy to a firm and say, OK guys, you've got to export and I'm going to come after you if you don't and I'm going to withdraw the subsidy. That needs enforcement capacity. Where exactly do we see that in many of these low-income contexts? So, if you do have industrial policy there, we know what will happen. We will know that there will be cronyism there, favors given to particular firms, particular groups, and effectively that the policy will essentially become a mechanism of rent sharing. So yes, industrial policy can work if you are in the US and IRA, maybe a good example of this, or maybe a high, medium to high-capacity state. But in weak capacity states, industrial policy can essentially be a recipe for disaster. Now, what do you want to do in that context? What do you want to do then, in that context is to try to increase enforcement capacity of the state. Try to invest in capacity. There are a few pockets of effectiveness.
Some bureaucrats who actually can make the calls and know that they make the calls with politically correct, not palatable. Then, in other words, some firms may be you draw subsidies to some firms. They are fairly confident that decision can be supported from the top. Right. So what you want to do is create. So you cannot have generalized state capacity in this context. You've got to create pockets of effectiveness of some parts of the state which can enforce these sorts of policies. And then if you're confident that you can create these pockets of effectiveness in some parts of the bureaucracy, you can enforce these policies, then yes, it can work. But then the problem there is creating these pockets of effectiveness and believing that the political elites will not try to interfere when bureaucrats make difficult decisions. So, it's a big call. It's a big ask to expect that to happen in many of these country contexts. It doesn't mean that we should give up on industrial policy. I think that's what I'm saying.
It's a caveat. If we build up the capacity in some localized way in some parts of the state, yes, it can work, but that's exactly what we should focus on. How do you build up the capacity in those kind of contexts, rather than worrying about the policy itself?
AMIR LEBDIOUI:
Well, converge but then diverge from what Kunal has said. I completely agree that industrial policy in order to work requires the appropriate types of governance mechanisms. But the question is how do you build those mechanisms? Can you actually get there right away, or do you need to have some learning by doing and actually mistakes as well on the way? For every country that has successfully implemented industrial policies, I'm sure that you can find many flops. Many industrial policies that didn't work. But the question is, how do you use that as an opportunity to improve your institutions and actually get there? Those of you who know me here know that I'm obsessed with sports analogies. That's why I was very happy with the Mike Tyson reference. But in many ways, this is like sports. If you want to excel at a field, you can't just go straight to the top ten. You need to fail on the way. And learn from those failures. Another analogy from the glorious sport of curling, which is that when you do curling, as one never does, really, you kind of throw that little thing.
But then you have those people that skate on the way to try to rectify the direction. And that's also similar to industrial policy. You won't get it right away. And actually that might be a problem. Because then you expect that you don't have to touch it. But if you know that things might go wrong, you have the right type of mechanisms to make sure that you can rectify your industrial policies over time. So it becomes a very dynamic thing. And the very last thing is the alternative industrial policies are costly and they're risky. And that needs to be accepted. Same like in venture capitalism. No one wants to get it. But the thing is, what is the alternative of not doing it? And for countries that export mostly carbon intensive goods that are about to be hit by a carbon border, adjustment mechanisms from the EU that don't have the time to actually transition. Essentially, if they don't do anything they might hit the wall. So industrial policy is also a way to try to achieve structural transformation sooner.
It's not saying that you won't get there with market forces, but it's saying that you need to fasten the process. Same with what the US has done with the IRA. They are late to the game, so they're bringing the big tools to try to catch up.
SHRUTI RAJAGOPALAN:
I think we open it up now. We have about 15 minutes. So, Santosh, I think you need to wait for the mike, maybe, we have Ajay. We'll take one more and then, hopefully all of you can respond.
SPEAKER:
Santosh (UKNNOWN). I have an opinion on this concept of getting going on a learning journey, that we start something, and then over time, we'll learn it. In this, it's important to emphasize a whole array of things that are a feature of each country that are not specific to a field or a domain or a government agency. I like to use the phrase invisible infrastructure. This is about transparency, rule of law, a free press, the kinds of data that is captured, and so on. And these tend to be features that are common across all sectors. So when the invisible infrastructure is broken, it's much harder to get going on any kind of iterative refinement, so it's better to be cautious.
SHRUTI RAJAGOPALAN:
Santosh. Anyone else we'll get that one into.
SANTOSH MEHROTRA:
Question to Amir and to Ken. And that's about industrial policy. And I completely agree with Kunal that government capacity is central to the success of it. Let's just remind ourselves we are sitting in Washington. Washington consensus was very much against the notion of industrial policy, recall John Pages' work, the Station Miracle, 1993. I don't have to remind this audience, I'm sure. Amir and Ken, government capacity…Now Amir, you brought up the issue of regional markets as opposed to small, small countries having are too small a market. What's preventing the African Development Bank and the World Bank, which are very active in the region to actually promote industrial policy in a group of states in the region. So you have actually an enabling the possibility of industrial policy actually succeeding because you're also ensuring markets. So that's the question to you.
My question to Eliana. I spent 15 years of my professional life working on and researching on skills not just in India, but also in the Asian region. Eliana what is it that prevents most of us from being able to convince governments from pulling back from their supply driven approach to skill development and ensuring that they actually learn from Germany's example and not just Germany's example. I mean, it's Austria, it's Switzerland, but it's also Brazil. I mean, Brazil has been a very good success story since 1942 with their levy-based system of financing the five S's. Now, I sense that your Latin American, what do we need to ensure that this levy-based system which has proven to be a very successful model of ensuring expanding financing from the private sector because that's what ensures skin in the game from the private sector. The governments actually don't want to give up control. Why can't we get, you know, the banks spent $1 billion on skill development in India. I wish you were doing TA in India in this space will give an arm and a leg for you to do that if that was to happen. Thank you very much.
SHRUTI RAJAGOPALAN:
And the gentleman at the back.
JAMES FOSTER:
Thank you. James Foster from Gatsby Africa. I've got a question, I guess, about the choice of sectors, and maybe we'll come to that later in the conference. But I guess the green industrial policy element at the moment, it feels like a lot of funders are running around looking for those amazing sectors that are both green and positive on the environment and so on. And whereas many countries like Tanzania mentioned earlier doesn't yet have a thriving plastics industry, but it needs one and it could grow one and it could be then really helpful in its food packaging industry. We're not going to help that because it's not quite aligned to our our goals at the moment. Similarly, it has a bunch of coal next to an iron ore stream. It's obviously ripe for an iron and steel manufacturing plant. It's exporting some of its coal to Europe. We're not as Europeans or as funders, we're not supporting it to develop its iron and steel industry because it's not green. So, I guess where do we stand on that agenda and how do we make the right choices or help countries make the right choices when we're pushing a sort of green industrialization agenda at the same time?
Thank you.
SHRUTI RAJAGOPALAN:
Excellent. Eliana, do you want to start? And then we'll just take the questions in whichever order you guys would like to respond.
ELIANA:
Very good. I will start, but I also want to ask a question to the other panelists at the end, not not not right now in the next round. No, I just wanted to say yes. I am aware of the conversations that are happening now with the Government of India. Actually, there is an operation on skills that is being restructured. So but just to, you know, address your question about the private sector and having more skin on the game. I believe that essentially one of the reasons why we haven't seen much change in this space is because the skills agenda so far has been driven by the education sector. OK. And skills is not education. Skills is what happens between education and the execution of tasks. Is this knowledge that happens when people translate education into, you know, something that they can do in a productive space. So there is a shift inside the institution. We will see, you know, how successful we will be at this. But now we are starting to talk about employability or skills for employability more generally, to try to emphasize the need to think about, you know, skills in the context of the labor markets, so that on one side, this means that in practice, you know, within the bank we have started to see a bit more of cross-sectoral projects that are mixing the education team and the social protection team, strengthening the linkages and the relevance with the labor markets, either by introducing sectoral boards or by also trying not only to put an emphasis on TVET, but on private sector solutions to the skills, problems, etc.
Now, I wanted to say that I think that it's a bit imprecise to say that the private sector doesn't have a skin in the game. When I work with the private sector and I have worked closely in my projects, they are the ones that are developing solutions. This is a problem that they are facing. They need to source qualified labor, and the education sector is not delivering that qualified labor. Oftentimes, they are the ones that are innovating in this space in terms of curriculums, you know, training approaches, etc. And these curriculums then, you know, are delivered at a larger scale, eventually, and are absorbed as part of the mainstream TVET system. So I have also seen, particularly in countries that have weaker systems, like in Africa where they are still developing, for example, the private sector is really, you know, driving the development of the labor market and the skilling systems and having an active role.
SANTOSH MEHROTRA:
The state needs to withdraw for that to grow.
ELIANA:
Exactly. So now, it's also that it’s... as you said, it's more like this conversation about what is the appropriate role for the public sector versus the private sector, right, and how these two, the TVET system that is, you know, public, and these other, you know, emerging models of training that are usually more responsive also to the changing labor market, can really work together, right? And to what extent the government should simply, you know, like, provide resources to co-fund or co-finance the delivery of these training programs? Now, I do believe that there is a role for the government to deliver some skills to extend that they may be, you know, foundational, transferable skills across sectors, but one of the challenges that we face in this space is that when firms say they don't find the skills that they need, they are not thinking about the industry-relevant or sector-relevant skills. Oftentimes, they are talking about firm-specific skills, right? For example, I can tell you in Mexico, Audi and BMW need two different sets of skills for their workers in the plants, even if they are in the same automotive sector, because they have different type of equipment, etc.
So just to signal, you know, what is the extent of the specificity? So I do think that there is a role for the public sector to fund some of the more foundational, transferable, and then there is a gap that will always will have to be covered by the employers themselves. The other thing is I believe that there is a role for the government also to produce more of these skills than what would be optimal from the private sector perspective to produce. The private sector is only, you know, producing these skills to a level that it meets the need that they have, like, to fill some vacancies. And oftentimes also the way in which they target their programs is different from what a national program would do. Normally, you know, they first select the participants, the trainees, and then they deliver the skills, right, as opposed to, you know, delivering the skills to a larger segment of the population and then doing the recruitment, you know, after the...
SHRUTI RAJAGOPALAN:
Santosh, I think you'll have to chat with Eliana after. We have six minutes, and I want to make sure I give a chance to the rest of you to just respond quickly to all the questions that came to you.
KEN OPALO:
Yes. So I'll start with a question of energy, something that I've also thought about in the context of Africa. I think there's a tension, as you highlighted, right? There's quite a bit of hypocrisy at the global level, which unfortunately we tend to ignore in the field of development, right? So we know that the North is not going to stick by the energy commitments, and yet we design policies and strongly encourage policymakers in low-income countries to act as if these global compacts actually make sense, right? I think we should be very honest about this fact, right, and allow low-income countries to pursue independent energy policies given the environment that they're actually working with, right, as opposed to imagining that we can constrain them, pretending that these global compacts are making sense or that people will follow through on them while confining them to energy poverty, and therefore making it much harder for them to industrialize, or even have functional service sectors, right?
Electricity is needed for a whole range of services that are not working as efficiently as they could in low-income countries because of brownouts and power cuts and all that. So that's something that we should be very honest about, right? Energy is core to growth, and we can't have growth when low-income countries are confined to energy poverty. So more gas, if it's available, I guess, would be the mantra. And so on the World Bank and industrial policy, I guess at the regional level in African countries, I think part of the challenge is personnel-based, and, you know, there are lots of other challenges. But I think, you know, who's the typical person at the bank who's helping a typical African country, right? It's not a person who's trained to think in these terms, right, and especially when you try to say that, oh, you know, we can't have a clear-cut, designed intervention that we can evaluate. And asking you to take a leap of faith and learn by doing, right? The career incentives are just not there.
The technical training is just not there. Quite frankly, the political economy analysis that would be needed to help countries sort of execute on some of these projects, you know, at the national level, not to mention the regional level, are just not there, right? So if I could do one thing, I would focus on just personnel, right, getting enough people in the room who have an alternative perspective on how to achieve these outcomes, and then hope that, you know, they can have seats at the table to help design some of these policy interventions.
SHRUTI RAJAGOPALAN:
Amir, do you want to follow up on that, and then we'll give Kunal the last word?
AMIR LEBDIOUI:
Yeah, sounds good. I was hoping that you would address the tough questions on coordination, but first on, I think you discussed the sector selection criteria. Something that needs to be really clarified is that what is green in one country might not be green in another, no? The definition of green is actually very contentious because let's say the global north suffers perhaps from the kind of carbon tunnel vision, the carbon obsession, so all the green agenda is really about emissions. In many countries, African countries, the biggest ecological challenge that they face is not emissions, but actually material waste, material pollution, plastic pollution, biodiversity loss, overuse of renewable resources like water or fishery. So there is a big question there in terms of how do you own the green agenda based on your local realities and what you need to do, and clarify whether you're pursuing green nationalization for someone else's demand, or if you're doing it for your own ecological needs, right?
That sector selection issue needs to be really driven by governments so that they are also accountable to citizens as to why they've picked one sector over another, and it's not externally imposed, which is something that really tends to happen, right? On the coordination issue, that's a very good question as to why are they already coordinating, but there might be the sense of necessity, right? And actually, one of the great examples of multilateral coordination for an industry is Airbus, where France, Germany, UK, and Spain got together because they saw the threat from Boeing dominating the skies, and that created that urgency for them to pull together resources for R&D, different supply chains to actually build Airbus. Now on the African continent, you're absolutely right, there is so much more that can be done at the regional and sub-regional level, but it requires different types of capabilities to actually negotiate this at the multilateral level. And then governments and private sector versus state, to finish with another sports analogy, governments should behave more like the head coach, like the Zinedine Zidane of the economy, that they don't have to be on the pitch to make a difference, they don't have to be just the referee that sets the rules, but even to being on the sidelines, they can set the vision, the strategy, the training that enables the teams, aka the firms, to be a lot more competitive with one another.
SHRUTI RAJAGOPALAN:
The day we have a government like Zidane, I think we can wrap up shop, we don't need to have this conversation. Kunal?
KUNAL SEN:
Yeah, just very quickly, I want to come back to this point about skills and so on, I don't think you're saying this, Eliana, but what I might disagree is that ultimately if you look at what's going on, right, the cycle transformation process, a whole bunch of workers still in agriculture, South Asia, Sub-Saharan Africa, where they move, as you heard this in the morning, they're moving to non-tradable, very low productivity services and in India construction, right? So they're not moving to manufacturing, they're not moving to tradable services. Then the question then is that, OK, you're skilling these workers, right, and where exactly are they going to end up? If there isn't enough demand created for the formal, the better jobs, whether it's formal or even upper, you know, better quality informal, so the problem really still is where is the demand for this, right? And I think at the end of the day, that's why one has to be careful because one pushes towards the skilling agenda, one forgets, well, the government needs to think about job creation, good job creation, right?
And I think that, I know the bank is not thinking about these issues, but that's where the real challenge is right now, right? And I think that's something we haven't got very good solutions right now for these two big areas of where most of the poor people live, Sub-Saharan Africa and South Asia. So I think that's what we need to be careful that that particular agenda doesn't get missing.
ELIANA:
No, absolutely. And I think that that's what I meant to refer to when I mentioned that one of the problems that we have is that this agenda has been driven exclusively by the education sector. And we need to think about this in a more comprehensive way.
SHRUTI RAJAGOPALAN:
Thank you so much. I could do this for another hour, but I think we have a session right after this, no break. Thank you for being here. This was a lot of fun. Thank you.
- Eliana Carranza, Global Lead for Labor and Skills, World Bank
- Ken Opalo, Associate Professor, Georgetown University Walsh School of Foreign Service
- Kunal Sen, Director of UNU-WIDER and Professor, Global Development Institute at the University of Manchester
- Amir Lebdioui, Associate Professor of the Political Economy of Development and Director, Technology and Management Centre for Development at the University of Oxford
-
Moderator
- Shruti Rajagopalan, Senior Research Fellow, the Mercatus Center at George Mason University
Fireside Chat: How to Take Useful Action on Economic Growth
5:15 – 6:00 pm EDT
MARK PLANT:
I encourage everybody to take a seventh-inning stretch if you need to, but don't leave the street or the seat. The hot dog stand is not open. So take a stretch and we'll set up for the next one. (UPBEAT MUSIC) Gentlemen, so it's time now for our fireside chat. We don't have a fire, but we'll have a good chat. We have two well-known persons. According to his biography, Lant Pritchett has retired three times, but is still very active and I think hangs at least one of his hats at LSE. And Manish Sabharwal is the vice chair of Teamlease Services. And a coin was flipped in the back room and Lant won the toss, so he gets to start the chat. I leave it to you two gentlemen.
LANT PRITCHETT:
So I'm super happy to be here, super happy to be on a panel with an actual private sector entrepreneur who has been successful outside of the development discourse and actually been successful in creating a firm that employs more people than the city I grew up in. I want to just talk about two things. One is why I've been focused on recentering growth and what I think that might take. And the second is to sort of think of some of the arguments against recentering growth, in particular, from a funding emphasis point of view. So I wrote in 2002, I wrote a paper called What's the Big Idea? That was about the debate over the ways in which one could successfully promote growth. Sort of the market, you know, the big push industrial policy of the 60s and 70s versus the counter, you know, structural adjustment, Washington Consensus, and we were discussing what's the third generation of growth policies. Little did I know that all of this would become moot because people would lose the idea that there needed to be a big idea about how to promote growth and that what Arvind called the nano development would become, in some sense, a principle agenda, not of countries.
And again, I think Arvind was very correct. I was asked at a panel last week to talk about the future of development, and I said let's distinguish between the future of development that the developing countries are going to do, the future of a development industry of people who self-consciously are doing development, and the future of development research, what academia is doing, and frankly, if the development industry and the development research don't refocus on growth, they become irrelevant to the future of development. They don't alter the future of development. They just become irrelevant to the future of development. So I was at a speech given by the head of the UNDP, which is one of the largest funders of development, or at least was at the time, this was probably almost, and he just blithely said, we have learned from experience that economic growth doesn't deliver on the goals we have for development.
And I was like, that's either stunning ignorance or a stunning lie or both. Like, just nothing could be further from the empirically documented realities about the relationship between levels of well-being in nearly every dimension and economic growth. And then our friends at J-PAL issued, you know, like a blog written by the executive director of J-PAL saying, well, you know, growth can help, but growth is not enough to produce poverty reduction. And then I thought, again, that's just so blatantly, obviously false in the data that how would a person of even moderate information and responsibility say such a crazy thing? And so I realized that the global development discourse, and again, not at the country level, I mean, nobody in India was saying, economic growth, who cares? It was like, can we get to six? Can we get to seven? So I basically wrote a series of things that make the case that not just that growth is one important factor in achieving human well-being, but it's far and away the dominant factor.
And that for certain things like poverty reduction, it's what I call not logically necessary and sufficient, you know, but it's empirically necessary and sufficient. No country has actually reduced poverty from high levels to low levels without the median person in the country also getting enormously better off. There's no successful programmatic approach to, again, there are cost-effective, potentially interventions that cost-effectively address poverty, but they can't push you from 80% poverty to 20% poverty. There's just no, you know, it's outside the realm of all experiences of all time that that ever happens. And yet, you know, people are claiming and conversely, no country, it's just false that economic growth isn't enough. No country has gotten rich and yet continued to have high levels of poverty. It's just so, so I think that's the synthesis paper. And, you know, Arvind was already reluctant to bang the drum about it because hopefully, everybody knows it. But I just want to reinforce that nearly every objective that any of us have from a normative point of view of how human well-being will improve is going to be massively facilitated by a more productive economy.
Just, and it's maybe even stronger than that. It's just not going to be achieved in any other way. So I think that's, you know, the big question is, again, how do people who, you know, have the sense enough to get dressed in the morning, deny this? And that, I think, is a complex political economy inside the development industry, that the development industry became less interested in being engaged in promoting economic growth, and hence they convinced themselves that it wasn't really that important. So I think the causation ran backwards. They changed their mind about what they wanted to do, and so they changed the facts or attempted to change the claimed facts about what was really important. And I think part of the effort of recentering growth has to be recentering ourselves on the facts about where, you know, what kinds of standard of living people are actually living at, what can be accomplished both with private and the public sector with economy of a given productivity, and the realization that whatever the other challenges are, this is, you know, if you want to be in partnership with development of the countries, you need to assist them in making their economy more productive because that's what they want to do, and whatever other arguments might, you know... Anyway... So, and I think the paper is out there.
It's in the printed material. I think it's compelling to anyone who's willing to just look at the data because the analysis is not that sophisticated. It's like, here are all of the, you know, here's the observations of every country's poverty and their level of median consumption. And here's the scatterplot. It isn't like—this is about facts. This isn't even about causal analysis. It's just the facts. OK. Second. And then I'm super anxious to get to Manish, who, and then the questions. The second thing is I think the main obstacle to greater funding and greater from action on the growth front is some amount of recalcitrance on the acknowledgement of the importance of growth, but some amount of what specifically would we do? Right. And I think the experience of structural adjustment gave people the impression that an economist only had one view about how to promote growth, and that was the dominant, completely overweening orthodoxy, and secondly, that it was wrong. And therefore, even if we wanted to promote growth, we just don't know how.
And there, I think this is the second reason, I think, and the important reason for this meeting and a growth summit is, you know, we are much further along in understanding the processes of creating economic growth and the analysis of economic growth than we were in 1982. 1982 was when Mexico defaulted on the debt and structural adjustment of necessity came into the world, of necessity of the American banks not getting defaulted on. That was the necessity that drove structural adjustment. So, you know, it's not as if we're, we can say, well, we don't know how to do growth because I would make two cases. One, we have learned a lot about just the empirical nature of growth, about it being episodic, about what the correlates of episodes of growth are, of the specificity of growth, prioritization, meaning that while the Washington Consensus may have said some things that were generally true, it wasn't ever intended to be, nor was it an accurate representation of everything one could do to promote growth.
So but I think we've made a ton of progress on that. Second, I often, I'm going to have a second and a third. Second, I think this argument is just weird because if I came to you and said there's this really devastating disease called polio and it has these devastating, lifelong consequences for children, but we don't have any way of preventing it, no one's conclusion is, Oh, polio is not so important then, like, no, no, let's work on a vaccine. If we have an important objective that we'd love to achieve and we don't know how to do it, like, what could be a higher priority domain for doing future research, unless you somehow believed that it was just an impossible question? Like if someone came and proposed research in physics on, you know, faster than light travel, you might say, well, geez, that's just incompatible with our known science. And so we're not doing research about what's impossible, but it's clearly not impossible to generate episodes of growth. I mean, you know, it's almost ironic that Robert Lucas wrote a paper about economic growth saying, man, it would just be so important if there were anything the Indian government could do to accelerate India's growth in 1988.
It's like, turns out, Bob, there is it turns out this, you know, the Hindu rate of growth wasn't inevitable. It was an actual thing. Yeah. So I think growth is super important, demonstrably important, has moved, never moved off the agenda of the developing countries and their governments and or their people, but has moved off the agenda of the development industry and development academia for exogenous reasons about the internal dynamics of the discipline of economics in one sense and geopolitical changes in another. I think both of those within that it's possible to recenter on growth. I think the argument against focusing on growth, I'm now remembering the third thing, that we don't know how to do it. Hey, well, if you don't know how to do it, like, that's what research is about. Like we don't say, oh, dang, I wish we had a vaccine for this disease, but we don't. So we're going to pretend it isn't important. We'll do research about it. And the third thing is, is I think this alternative agenda that acts as if promoting economic growth is hard, but doing other things that would improve well-being in those same contexts is easy.
So you might say, well, in this country, it would be really hard to create a political coalition to promote economic growth, but we can do all these wonderful things to reduce inequality. Well, maybe, but that would be an odd political economy in some sense, that this is politically impossible. But this other thing that might just be just as politically objectionable and less and equally unattractive to the elites is possible. So oftentimes the debate is framed as if growth is hard, but programmatic interventions are easy. Again, maybe. But lots more countries have actually managed to promote rapid economic growth than have managed to create education systems that really educate children well. So some things we think of as logistically easy turn out to be harder. So anyway, so I think as it might be obvious, I'm like gung ho for getting growth back central within the development agenda. And I think the arguments against doing so are just, you know, yeah, the arguments that it's just not important just strike me as surreal and I think demonstrably so.
And the arguments that it's important but we don't know how, I'm sympathetic to, that, you know, it is a super complex, sophisticated, you know, how do you work with country governments to which us outsiders are going to be marginally relevant to create conditions in which the kind of triple, effective, doable and politically supportable emerge? That's a super hard question, which is why we need 1000 times more people than are in this room today working on them. So let me turn to Manish, who has been, I don't need to prompt him. He's been prompted for kind of opening questions or what he wants to say, and plus he can say whatever he wants, but I think it's just wonderful to have an actual. Everybody talks about the private sector, but no one actually listens to them. So Manish is a successful entrepreneur in India and I love to hear what he has to say. Yeah.
MANISH SABHARWHAL:
No, I mean, I'll explain why I'm not an admission error or a trespasser in the conference. I've hired somebody every five minutes for the last 25 years, but only hired 5% of the kids who came to me for a job. So about ten years ago. So I started as an entrepreneur. I started the company straight out of business school. And ten years ago, I realized that the only thing that stood between me and a million employees was really public policy. I have 400,000 employees on it right now, but I probably should have four or five times that number. But it wasn't inside the company. I could do better IT systems, I could do better sales, I could do better marketing, but that would get me to 30, 40, 50% more. But my ambition was to be five times more or ten times more. And that binding constraint was external to the company. And for us, the questions on the earlier panel, you know, the thinking versus doing question and Kunal sort of worm's eye view versus bird's eye view, you know, which matters more, we deal with it on a daily basis.
Right. And I don't think that, and I think the problem is we don't meet enough as thinkers and doers. Right. My father wore a uniform and he worked in national security. But a plaque behind him which he always used to carry with him all his life was that “any army that has too much of a gap between its thinkers and doers will have its fighting done by fools and its thinking done by cowards.” So I think that it's really important to think about that, because sometimes this thinking and doing world gets so parallel. You do your own thing, you look down upon us as we're, you know, we get no big picture and we look down upon you as you get nothing done. And I think that is really important to sort of not recognize that that's the stupidest view of the world. I mean, if you only do things, you'll do nothing great. If you only think, you'll do nothing. And from my perspective, that sort of, that's why I sort of started spending so much time on public policy, on labor markets. And obviously, I went to Lant’s class many years ago, and it was just clear to me, and especially in the last five years where I've spent it on the central bank board, that we have oversold fiscal and monetary policy.
I think either we've mislabeled it or oversold or whatever. You know, I haven't, after five years on the central bank board, I haven't decided whether monetary policy is a placebo or a painkiller or a steroid. It's clearly not a medicine. And it's very, it's really important to start, you know, recognizing that it's a very important part of policy, but it doesn't do as much as we think it does. And obviously, if fiscal deficits could make countries rich, then why would any country bother being poor? Right. So I think that overselling fiscal and monetary policy has really become a challenge when you take the worm's eye view of daily life of employers. Right. I think whether it's firm productivity, whether it is demand driven skills, two of the, you know, important issues, which I spend most of my time on. And in India, we can sort of, we have to explain it, right? I was raising this question with Lant that I don't think 30 years ago you would have predicted that a democracy like India would have delivered or, well, China has delivered -13% shareholder returns in the last 30 years.
India has delivered 1,300%. So we have delivered 13 x. If you put your money in India 30 years ago, you made 13 times your money, while in China you lost 13% of your money. But they moved 450 million people from farms, and we still have 42% of our labor force working in farms. You wouldn't predict a democracy, would not deliver wage growth and would deliver shareholder growth, while autocracy would deliver wage growth and wouldn't deliver shareholder growth. Right. And I have spent a lot of time in my limited perspective, and I don't speak for other countries or other stuff like that, is that, you know, infrastructure... Why isn't India generating the good jobs? Why is employed poverty? India doesn’t have an unemployment problem. Everybody has a job, but we have 35% of our people are employed poverty
Or, you know, they've got a job, but they don't make enough money too. And that goes back to productivity of five things, right? Which state you live in, which city you live in, which firm you work for, which sector you work in, and what skills you have. Right? It's obvious, the state Karnataka, where I live in Bangalore, you know, we have the same GDP as UP, but we do it with one-fifth the number of people, right? If you think about sectors, you know, agriculture is 42% of the labor force. It only has 14% of GDP. While we are all proud of IT, but it's a rounding error. And software is 0.8% of India's labor force, but it's 9% of GDP, right? So which sector you work in, which firm you work in, there's 24 times difference, I mean that all of you know how much difference there is in productivity between our large firms and small firms, between our formal firms and our informal firms. And obviously, with scale, you have, I pay four times different salary to a kid the same age, technically the same qualification on paper, but I will pay four times difference in salary.
And I have at least isolated in my mind the growth constraint for the private sector, right, it's not in. You know, infrastructure and skills in finance have shifted from being a dagger in the heart to a thorn in the flesh. I think we will get better at it. But now you can set up, you know, you can make 25% of the world's iPhones in India. And we will be this year. We have 40 China factory refugees. Maybe 20 of them will jump. I hope Xi Jinping doesn't get a fourth term. I hope he gets a life term because he's our biggest ally in that. So I think if you talk to these factory refugees, it's not infrastructure. It's not skills for the next 20 million. Yes, for the next 200 million, we have to do stuff. But for 25 million, I mean, we staffed up Apple with, Apple Foxconn is one of our largest customers. We gave them 40,000 people in six months. And so that was easily possible and doable in a country like India. And we could probably do another half a million. So I think, at least from my vantage point, if you think about for India, the only remaining one is really regulatory cholesterol, what I call it, it's just, it's a difficult place to do business.
And I talked about this regulatory cholesterol for a long time from a bird's eye view, right? But I only got traction in this when we moved to the worm's eye view. So three years ago, we put together the database of 67,000 compliances, 6,700 filings, and 26,000 ways to go to jail for an employer. You may say, well, how does anybody do business? Well, the transmission losses between how the law is written, interpreted, practiced and enforced. Obviously, the government got very upset that there's not a single CEO in jail. So how do these 26,000, you know, laws matter? I mean, there's not a single CEO in jail, so why are you making such a big deal? Why are you giving us a bad name? You're supposed to be an ally, you put out a report. And one of my favorite Hindu scriptures is the Vishnu Sahasranama, which roughly translates to so I told them, you know that, you know, it roughly translates to “why did God create fear? So he could take it away.” You know, the only reason we have these 26,000 is they are not using them for what they should.
We have 20 of them, we have 100 of them. A lot of private sector people should be in jail, but they should be in jail for very specific things which they deserve to be in jail for, not random stuff. Because if you have 26,000 ways, then nobody will be in jail, right? So I think from my vantage, and it's really that this kind of, you know, sometimes these conversations. In my mind, why is India poor? Because we don't have enough teamwork between the government, private sector and nonprofits, right? The government has an execution deficit, the private sector has a trust deficit, and nonprofits have a scale deficit. So at least the growth agenda will only truly come together when these three instincts, you know, people in government have very different instincts than people in the private sector. It's not better, it's just different. And it's needed. Me in the private sector has a very different instinct than importing a levy for skill development. We will manufacture our employees because it's in our self-interest, and we have started figuring out how to do that.
If you let us do that, right, if you, you know, degree apprenticeships, India only has half a million apprentices. Why? Because of Regulatory Cholesterol, and stupid Apprenticeship Act was written in 1961, where we, I mean, Germany has 2.7% of its labor force. Why don't we have 15 million apprenticeships? Well, either we should have 15 million apprenticeships or 5,000 CEOs in jail, because in India, if you don't have an apprentice, the CEO can go to jail. So you have neither because you have done it. And I would say that we, at least if you let us figure out our people's supply chains, if you think of IT, right, we had 400,000 engineers in 2004. In a boom, we went up to 1.8 million engineers in 2013. Then we had a slowdown. 400,000 engineering seats went off between 2013 and 2020, and now we're back up to 1.5 million because the most real-time people supply chain in India is in software. I mean, we have the switching costs and software that China has manufacturing. We did export more software than Saudi Arabia did oil in 2021.
Not now, but at that point. So I think the people supply chains, I mean, I was listening to Eliana, and I just saw her paper, and she's saying these things don't work. Maybe. Well, maybe they don't work because there was an execution deficit in the matching program. We think we know how to manage. We can prove that there's a return on investment for employers. In fact, we've built our business on that with faster time to hire, higher productivity, and lower attrition. I can prove to a CFO that your hurdle rate for hiring people is 12%. And in our degree apprenticeship program, we'll give you a better return than that. So this is not CSR, this is not DEI, this is not charity. This is just a more efficient people supply chain. So I think growth, from an India perspective, we're doing really well on the economic growth. I think we will continue to do that. I mean, we will never be China. I think we're never going to get to ten or something like that. But, you know, 6%, 7%, 8% compounding for 20 years.
And we will be consistently warm. We won't be hot, hot or cold. And maybe that's not that horrible. Or maybe that's actually a feature. It's not a bug. We, you know, if we're at six, don't worry, we're going to eight. If we're at eight, don't worry, we're going to six, is sort of the way we think. And so from our perspective, this growth agenda is really important. But if you want to deconstruct on why we have still have 42% of people left on farms, even though we're generating sort of GDP growth, even though we have generated 13 times returns for shareholders. But why do we still have 250 million people on farms? 30? I know 1991 was very important, and she has a project called the 1991 project. But, you know, 35 years later, we should not have 40. So if it was that great, then why do we still have 250 million people? So I think the growth agenda is really important. I'm a big fan of, you know, what Lant says in his paper. And from India's perspective, just that top-line growth has to translate into sort of the large firms, the good jobs, because that's finally the point.
And I think from the private sector in India, we are starting to catch our belief that we don't really need them to fix the people supply chain. We do need them to do primary education that we can't do. But the repair, prepare, and upgrade that all of us thought we were expecting from the government, we can do ourselves. But I'll pause here and... OK.
LANT PRICHETT:
We're at the time when we were supposed to finish, but everybody else has encroached. So why don't we take some questions? We'll take, given tradition, three questions. And we said very different things, so...
MANISH SABHARWAL:
Go ahead, sir.
LANT PRICHETT:
OK. Yeah. So why don't we take one. Let's take one from over there, a guy in the back, and then Nancy, because we're at Nancy's house, the Birdsall house. So one, two, three.
BRADLEY CUNNINGHAMM:
I'm Bradley Cunningham.
LANT PRICHETT:
Hey, it's Brad.
BRADLEY CUNNINGHAMM:
Hey. Good to see you, man.
LANT PRICHETT:
My vision's getting bad. If you stood up, I would have recognized you.
BRADLEY CUNNINGHAMM:
Ironically, as you were speaking, I got an email message about the B-READY indicators, so I wanted to ask about that. The B-READY indicators being... (CROSSTALK) OK, the new version of the doing business indicators.
LANT PRICHETT:
Oh, OK.
BRADLEY CUNNINGHAMM:
And I asked in part because they're supposed to be better. So it's supposed to be an improvement of looking at de facto and de jure, which, Lant, you know about. You've thought about it a lot. Taking out the rankings so that countries aren't setting their growth agenda around externally set indicators. But at the same time, it still strikes me as the wrong way for countries to set their growth policy. You know, the doing, the B-READY indicators are interviewing firms to get their information. But wouldn't it be better if these countries were, as you said, interviewing these firms themselves and getting their information about the business environment by having a dialogue with the firms? And it strikes me, you know, the work that I supported Matt Andrews doing in Albania when he just went out and had the Ministry of Economy talk to all of the 200 garment firms themselves, rather than relying on an intermediating entity to do that conversation for them. So I'm curious what you think about the role of something like a revamped doing business indicators, whether it's B-READY or whatnot.
And if I could indulge in a second question, maybe it's too parochial, but I really think there's an important role for large firms in this. But development has sort of fetishized SMEs, MSMEs, and in my job, it would be really difficult for me to the conversation about taking a firm from 100 employees to 500 employees. I can't do that because that's a large enterprise, right? And it's just accepted as legitimate to work with MSMEs and not work with large enterprises. So I guess maybe the question embedded in that is, is there a role for the small entrepreneur? I mean, surely there is. But surely that's not the only thing that we should be doing if our agenda is growth.
LANT PRICHETT:
OK. Let's go with you.
KARTHIK TADEPALLI:
Thanks, Karthik from UC Berkeley and GiveWell. I have a question about self-employment, because I think that a large part of the lack of unemployment numbers is that a lot of people are self-employed, 50 to 70 to 80%. And if you include even half of those people are maybe preferring formal sector employment, and they would really like a job, but they can't find one. The unemployment numbers start to look much, much larger than they might be in the official numbers, where it only counts people who can't find literally any job. And when you think about those people, like, what is the main barrier to those people finding jobs in any of the enterprises that you might try to train them for, or to get those apprenticeships, both in India and elsewhere?
LANT PRICHETT:
Great, Nancy.
NANCY:
I actually have two questions. The first is the one that I didn't have a chance to ask at the last session, which is, but it's relevant, I think. There was some brief discussion of the East Asian miracle, where one of the unusual factors associated with that miracle is that governments worked very closely with the private sector. So I'm just curious from either of you about whether that's something that might work in India. Do you think it's a good idea or a bad idea? The second question has to do with some of what...
SPEAKER:
Manish.
NANCY:
Manish, thank you. Said about the thousands of employees. My colleague Justin Sandifer, who's not here because he's probably in China right now, did a study which showed that in India, probably it was North India, not South India, most people interviewed who had finished primary school could not read a sentence. So, you know, maybe this is a question for Lant as well.
LANT PRICHETT:
Maybe.
NANCY:
You know, this sort of false distinction between working on education and health versus working on growth that has sort of been vaguely there in some of the discussions today. I'm not blaming either of you at all. I'm just interested in any comment on where can India go in terms of a highly productive, service-based economy, in a country where most people who finish primary school can't read a sentence without more attention to the human capital, and anything you can say about whom you hire and what they know and what levels of skills. And is it hard to get highly skilled people? And anything Lant can say about this issue of, well, you know, premature deindustrialization. So does India have to go into services? And how can India go into services, which are really based on so much face-to-face and use of letters and words to interact? Thank you both. Thank you both, very much, great discussion already.
MANISH SABHARWAL:
You comment.
LANT PRICHETT:
So let me, so I'm going to leave self-employment and SMEs to you because I think it's kind of interesting. And the B-READY, I can't say anything about it because I just have it. I didn't even... But, you know, I think the doing business indicators had a big problem in that they only represented the de jure. Right. And I've done a lot of research to show that what Ken was talking about and what Kunal was talking about, of deals, emerges when you have laws that you don't routinely enforce. So again, if you have a law, if you have 6,000 laws that you could go to jail for labor violations, but nobody's in jail, it really means everybody, it's given the government complete discretion because they could put anybody in jail that they felt like. Right. So I think the doing business indicators were worse than useless. I think, given that I don't know anything about the B-READY, I do want to say growth diagnostics was a prioritization exercise that colleagues at the Kennedy School and others helped, you know, when I was a part of the team that kind of put it together.
And I think that to the extent anything is a valuable contribution to a growth tech diagnostics exercise, it's helpful, to the extent it isn't, it isn't. Because the difficulty is, and sometimes when I would teach classes, I would start with a group this size and say, let's, you know, say what's good for growth. And I'll just write what you guys think is good for growth on the chalkboard. And somewhere about 25 things, separate things that were good for growth, it started to dawn on some people in the class that I was tricking them.
That holy shamoley, we've just listed 25 things that are good for growth. Which of those things, you know, a typical developing government can do three. Like if you're president of Tanzania and you have an agenda, it's gonna have three items to be ambitious. So how would you prioritize from the 25 things that are good for growth in the sense that if you did it in the long run, you would be better than if you didn't, versus what would be really super terrifically good for growth as today in this context, right? So I think to the extent that this B-READY can be an integral input into a growth diagnostic, it might be helpful. And it might be helpful even if governments could have done it. But I think you're also right that governments, unless and until they actively engage with potentially outsiders who can bring capacity and structure to it in growth diagnostics, nothing's really going to help them that much because all of these long list exercises, I mean, a long list exercise is gonna ultimately end up in a prioritization exercise.
And the less transparent the prioritization is, the more likely the prioritization is wrong. Because if you give a government a list of 25 things they should do or would be good for growth, then they're either gonna optimize on what's easiest or on what's politically most popular independently of what's effective, right? So again, growth diagnostics, growth diagnostics, growth diagnostics. East Asia miracle, I think there needs to be close interaction between private firms and governments. The best description of what happened in East Asia was Peter Evans, the sociologist's description of embedded autonomy. That the Korean institutions had autonomy to act as the government, but they were embedded. And they were embedded with private firms, right? And so can industrial policy work? Well, it seemed to work in some ways in India. I mean, in Korea, it's very hard to argue. In the East Asia miracle report that the bank wrote, there was a big debate about industrial policy. And I remember people were saying, well, Korea did really well, but industrial policy wasn't really a part of it.
And Larry Summers would have said, that's really implausible, you guys. And I'm like, well, what do you mean? It's like, well, if you're telling me that South Korea grew faster than any other country in history, but they would have grown even faster had they not had industrial policy, that's just stupid. That's really implausible that Usain Bolt is the fastest person on the planet. But boy, he would have been faster had he not run in the particular way he ran. It doesn't make any sense. So anyway, so the real problem, though, is that Korea may have had embedded autonomy, but most countries have in bed with the money, which sounds superficially close cooperation with the private sector can either take the form of just providing massive favors to politically favored firms that exclude actively anyone else. So you can get a growth boom, and this is what Kunal was describing as the, you can create a growth boom by getting in bed with a small amount of investors and creating a lot reliable, high profitability, high credibility environment for just them.
But that tends to peter out. So I think a deep question about growth is, how do you get embedded autonomy and not just in bed with the money? And that's a hard thing about the efficacy with which a government can actively and autonomously promote productivity in various sectors. So I am like on this reed and growth debate. I'm on all sides of it, which there's a phrase, consistency is the hobgoblin of small minds. So I'm a very large-minded guy on this issue. I have written various things that say, potentially very... So I think it's terrible, terrible, immoral, awful to put kids through school and not teach them to read. It's just cruel. To make a kid spend five years or six years or eight years of their life inside a building called school and not provide them the environment with which they can acquire this very business thing, that's terrible. I spent eight years of my life on a big research project on how to help schools be more effective at conveying real foundational skills. That said, I'm not that convinced that it's that often the binding constraint to growth.
I think if you can often take even rudimentarily prepared labor and make it vastly more productive by engaging it in a highly productive value chain. So I am reasonably confident that if you let someone from India with five years of schooling and couldn't read move to the Gulf, their wages would go up four times. If you let them move to the US, even as an illiterate person, their wages would go up 10 times, because I think Manish just listed all the ways that determine your income. And skills is one of them, but a lot of it is the place you're in and everything else. So I am all in favor of kids who go to school learning to read. Spent a lot of my life working on that. I don't happen to believe it's very often a binding constraint to growth, in part because a lot of it... if firms really want workers who can do it, they can remediate this at relatively low cost. So I forget that you had some nice phrase of repair, prepare...
MANISH SABHARWHAL:
And upgrade.
LANT PRITCHETT:
And upgrade. I think if firms were really beating down the door for workers, they could, I think, mitigate the consequences relatively easily. So Manish.
MANISH:
So the MSME question is, I'm not sure I've made up my mind whether small firms should be whacked and shut down or something like that. I would only say that the regulatory cholesterol affects them more than enough. I have 120 guys in regulatory affairs whose only job is handling the regulatory cholesterol. And for me, I don't care about it anymore in some sense. So if you really care about the romance of small and you care about the small guys, I think the first thing you would do is recognize that I can provide my own transport. I can manufacture my own employees. I can generate my own electricity, which I do, all these three things. But small people won't be able to. So we can substitute for the state, but small people won't here. So if MSME is a priority, then the regulatory cholesterol matters more to them than to us. I think the self-employment question is 50... It's the most embarrassing number about India that 50% are self-employed. It's not some overweighted entrepreneurial gene among Indians.
The poor cannot afford to be unemployed, so they are self-employed. But I believe, you know, I'm not an economist, but I believe there was this idiot Russian economist called Cheynov. He convinced Nehru in the 1920s that small farms are viable because you don't have to pay your kids a salary, your wife a salary, yourself a salary, and you don't have to pay rent. And he called it the theory of self-exploitation. And he wrote a book on it. These are not 50% are not self-employed. They're self-exploiting. And what has changed in India is that kids are no longer willing to self-exploit. Their aspirations have gone up. They've said, we're not willing to do this anymore. So the two shock absorbers in India's labor market, which were farming and sort of informal service or kirana employment, suddenly kids are saying, yes. I mean, it may be a job, as you said, but it's not it's employed poverty. And so the stock and flow of India's job market hasn't changed. But there is a lot of chaos about jobs because kids are saying, I won't do it.
So I think the self-employment has to come down, of course. And that's why I would prefer us talking about wages rather than jobs because that's what matters more than anything else. As far as school surveys, of course, I mean, there's some silver lining. The ASSA report, which is the one which has been doing this for 20 years, this is the first time that there's good news. I mean, I used to, yeah, there's more kids in school, more learning. 98% have digital access, more learning outcomes. For the first time, I used to boycott their launches because it was depressing. But this time, I went because it was some good news, not great news. But I'm sort of, you know, with Lant in some sense. You know, we were dancing with this course to school and college. Foxconn trains its workers for eight weeks, a fresher. You know, it's eight weeks of training in the classroom. And then it's eight weeks from then. And then because they have embedded everything into the machines, into the processes. So it's not very high-skilled people that are making your iPhones in some sense.
I used to think that that would be a problem. But when they showed up and when Samsung showed up, it's eight weeks. They do need to have numeracy, literacy, and that kind of stuff. But we will be able to find the first 25 million workers if suddenly India had this factory rush. The first 25 million may not be a problem. The next 100 million, 200 million, we obviously have to get our act together, which we are sort of trying to do. For us personally, 50% of our kids are graduates. 50% are not graduates. We pay the same salary to both of them. 50% of our 400,000 employees. You asked what is our pool.
SPEAKER:
Graduates say you want a graduate.
MANISH:
No, no, a bachelor's degree. 50% of our kids have a bachelor's degree. 50% don't. We pay the same salary to both of them. 40% of them are women. They're in 5,000 cities and towns. About 250,000 come to us every month. I only hire 20, 25,000 if the super cycle went up. But I would say, again, skills for the companies are a thorn in the flesh. They'll keep shouting at me. I need them to be more productive. But attrition is 50% for everybody, including, I mean, for many people it's more because they're getting better jobs quickly. So they wouldn't be leaving. They're trained. Yeah, once they're trained, it's an apprenticeship program of storage. So I would say that there's sort of good news on that front in some sense. On the human capital front, there has been a private. 45% of our kids are in private schools. You know, for the first 20 years, because of all these randomized control trials, we spend all our time in school education on smaller class sizes, teacher salaries, and teacher qualifications.
Turns out those three don't matter as much as governance and performance management. You know, just the fear of falling and the hope of rising for teachers, and just governance of who controls the resources. So now I think we've got over small class sizes and teacher qualifications, and we're doing something in performance management and governance, which I think may show up in another five or 10 years.
LANT PRITCHETT:
I'm just going to say one last thing, and then we'll break. Because I want to come back to the SME and self-employment. Because the essence of diplomacy is constructive ambiguity, in which we say the same word and mean radically different things, so we agree. And the value of academics is destructive precision. I think within the development community, there's been this talk of entrepreneurship. And there's two meanings to me of entrepreneur. One is, you go from small to large. So Manish is an entrepreneur, right? The other meaning of entrepreneur is, fuck you, you're not gonna get a job because our economy isn't generating any jobs. So we'll train you so your self-exploitation will be more effective. And so you'll be a self-employed entrepreneur. That's just mean. To tell a kid, we're gonna train you to be an entrepreneur because our economy isn't generating any jobs, and you've now just gone through 10 or 12 years of schooling, and we can't provide you a standard of living because your productivity isn't high enough in order to justify the costs of labor that we have superimposed on.
Oh, so you're an entrepreneur. I think that's just mean. And the development community has been part of promoting entrepreneurship to mean self-employment, like microfinance. It's like, no, no, no, no. If we're talking about economic growth, I want to talk about the kinds of entrepreneurship that's consistent with and generates economic growth in which one entrepreneur hires 100, 500, four times the city of Boise where I grew up at the outskirts. That's entrepreneurship. To describe, not that you're doing it and I'm pointing to you, but even to describe it as self-employment is a little flattering. It's just you have to do something if there's no social safety net. But it's worse to say, oh, these graduates don't have skills, or our economy isn't generating a job, so we'll create entrepreneurship programs. That's just, again, oh, that's entrepreneurship. No, no, no, that's not what we should mean by entrepreneurship, in the sense of entrepreneurship is necessary for growing, thriving, structural transformating, jobs creating economy.
MANISH SABHARWHAL:
So the services versus manufacturing, I just wanted to add that. I think Rohit didn't respond to that when they mischaracterized your book, because India doesn't have to choose between services and manufacturing. We're just too large to make that decision. Popcorn stands like Singapore or something may have to make up their mind. But we don't have to choose between manufacturing and services. We will do both. We will do both of them hugely. We will do both of them well. And it turns out Apple doesn't manufacture iPhones. It makes them. It doesn't manufacture them. And the difference between services and manufacturing, Mercedes Benz India, they have 40,000 employees. Only 3,000 people make cars. 37,000 people write code. Robert Bosch India, 26,000 people write code. And 2,000 people make spark plugs and other things. So the difference between services and manufacturing, as we traditionally understood it, so much of manufacturing company revenues come from services. So much is embedded code.
So I would say this pure distinction between factories, software, who's making, whose manufacturing is blurring, and that actually plays to our advantage. I remember many years ago, many economists telling us, oh, global services is only $7 trillion and global manufacturing is $27 trillion. So why is India wasting its time on software? It'll never get there. But it turns out that software capability is now driving the 1,800 global capability centers, which are bringing work to India that they wouldn't have outsourced to either IBM or Accenture or to Infosys or Wipro. But Goldman Sachs now has 45,000 employees in Bangalore doing work that they probably would not have given to a firm outside. So I would say from the industrial policy question, I mean, the role of the government isn't to set things on fire. It is to create the conditions for spontaneous combustion, if you want to. At least that's how I think about it. So if you love MSMEs, if you fix it for them, you'll fix it for us.
LANT PRITCHETT:
OK. Thank you very much.
MANISH:
Thank you.
- Lant Pritchett, Associate at Building State Capability at the Harvard Kennedy School and the RISE Research Director at the Blavatnik School of Government, University of Oxford
- Manish Sabharwal, Vice Chairman of Teamlease Service and Co-Founder of India Life
Drinks Reception
6:15 – 7:30 pm EDT
Agenda
The Funder Perspective on Economic Growth
9:00 – 10:30 am EDT
MARK PLANT:
Good morning, everyone. Welcome to the second day of the Growth Summit. We hope you're well-rested and ready for another interesting day. We're gonna start off with a view from the funders, if you will, from those who have a financial interest in promoting this agenda. And to lead the discussion, we have Emily Oehlsen from Open Philanthropy. So, I give the floor to Emily.
EMILY OEHLSEN:
Great, welcome, everyone, to the second day. I wanted to thank everyone again for coming and then take an opportunity again to thank our illustrious host, CGT, CCI, and growth teams. I also wanted to take a quick moment to say a thanks to the full CGT team who's putting on this event. It takes a tremendous amount of work to make something like this happen. And so I just wanted to call out Marc, Nicole, Charlie, Jeremy, Sarah, and Eva. And so I just wanted to have a quick round of applause for everything they put into this. (APPLAUSE) Great, thanks. So, to give you a sense of this panel, I'm gonna talk for a few minutes and give you an introduction to myself and some of the work that my organization does. And then I'm gonna turn it over to the excellent panel that we have here. They're each gonna talk for seven to ten minutes. And I'm gonna ask them a few questions. And then we'll open it up to the group so that you can ask questions. So, please be thinking about what you wanna ask over the course of the next 40 minutes or so.
To give a brief introduction, so my name is Emily Oehlsen. I'm a managing director at a funder called Open Philanthropy. We give away about $800 million per year across a range of areas, science, and biomedical R&D, targeted at neglected diseases, research and policy advocacy across a range of topics like air quality and lead poisoning, work to mitigate risks from AI and biosecurity, among many other topics. I think to quote Arvind from earlier, we are a nano organization with nano resources and sometimes focus on some nano interventions but we're expanding our work. And as of a couple of days ago, we launched a Program Officer search focused on economic growth in low and middle-income countries. So, I'll come back to that in a little bit. But we're really excited to be doing more in this area. And I'm particularly gratified to be here to learn from all of you, and then particularly to learn from this panel, who's been doing this work for much longer than me. So, at Open Philanthropy, we often think about problems or areas where we might direct grant-making resources across three dimensions.
So, the first is importance, how many people are affected by a given problem, and how much? Tractability, how much progress can we make with a marginal increase in resources? And then neglectedness, how many other dollars are flowing to the problem, especially philanthropic dollars. And where can we find a neglected niche. And so I won't say very much about the first topic importance, I think Lant covered it very well, among others, yesterday. But I wanted to add one comparison that's particularly stood out for me. So, at Open Phil, we have a standard methodology for comparing health benefits and income benefits. And according to our own welfare comparison, accelerating growth to take one example, the Philippines to Chinese rates over the period from 1980 to 2023 would have had the same impact in our own terms as eliminating malaria globally over that same period. And so that's an extreme outcome, but I think it helps fix the idea that actually supporting more rapid growth has the potential to be deeply transformative at a really unbelievable scale.
So, I wanted to spend a little bit more time talking about tractability and neglectedness. So, we've been looking into what we could do on economic growth for a really long time. I think the co-founders of Open Philanthropy started talking to Lant about prioritizing economic growth in low and middle-income countries before Open Phil even had its name in 2012. And so the big question has always been, what can we do about it? Are there tractable interventions where we can really make progress? And so our research team has spent time over the last several years looking into this question, investigating the literature, looking into potential grants, interviewing experts. We've also commissioned a number of reports from, I think, everyone from someone who is in this room today and asking them for specific ideas of what we could fund. And we're really far from definitively answering the question. But I wanted to share a few examples of things that have made us optimistic that we can find specific places to deploy money cost-effectively.
And so the first is in 2023, we gave support to Arvind to give economic policy advice in Tamil Nadu, which as everyone knows, has a population of 76 million people. And so Arvind has been advising the state on reforms to the energy sector and tax policy. We've also been advocating for the renewal of the African Growth and Opportunity Act, AGOA, here in the US. And again, I think most people know what this is, but AGOA was initially passed in 2000, and it gives sub-Saharan African countries duty-free access to the US market for a range of products and in particular apparel. And so research by Arvin and Justin, who I don't think is here today, suggest that AGOA significantly raises exports for eligible countries and it's set to expire in 2025. And so we're trying to collaborate with others to advocate for a strong renewal, the potential for additional provisions that would lead to export-oriented growth. So, taking a step back, these are just two examples. And it's a big open question for us whether we're gonna be able to find more.
But after spending a chunk of research time over the last several years, we emerged optimistic that there are indeed concrete and promising opportunities for additional philanthropic funding. Coming back to the second topic I mentioned, neglectedness, so we're also interested in understanding, are there particular niches where Open Phil could complement other actors. So, of course, economic growth is far from a neglected cause overall. For decades, organizations like the World Bank and IMF, aid agencies, private foundations. And then, as we heard a lot yesterday, especially state and country governments have invested cumulatively hundreds of billions of dollars into this question, and it has never really left the agenda, as we discussed yesterday. So, what can Open Philanthropy add that's distinct? And so I think there are a few places that I'll hit quickly, but we're still very much in the learning stage on this question. And so the first is that we're comfortable taking risks, making bets with low ex-ante probabilities of success if the upside is high enough.
The second is speed. Our budget is very small, but our grants typically take around a month to be approved. And we think that compares favorably to some other actors in the space. And then the third is flexibility. We're less constrained in the grants that we can make, especially compared to bilaterals or multilaterals. And we can more easily support civil society organizations or policy advocates. And so we are launching a program in this area. We're looking for a program officer to lead the work. If we find someone great, we're gonna commit $30 million over three years. And so if anyone is interested in applying or know someone who's interested in applying, we'd be really grateful. I have two colleagues here, Rafael and Oliver, so please find me or them to chat about it. And we have lots of information on our website. So, now I wanna turn to this panel next to me. So, they've been doing this work for much longer than Open Philanthropy. And so I'm really eager to learn from all of their experiences.
And so I'm gonna hand the mic over to each of them, or actually, they all have their own mics. I'll introduce each of them one by one. So, Gargee Ghosh is the President of Global Policy and Advocacy at the Gates Foundation, where she leads international political and economic affairs. She oversees the foundation's relationship with governments, intergovernmental organizations, advocates, and philanthropic partners worldwide. Professor Adnan Khan is the Chief Economist and Director of Analysis Directorate at FCDO, and he's seconded from LSE and is a Professor in the School of Public Policy there. Abebe Selassie is the director of African Development at the IMF, where he oversees operations and engagement in 45 countries across sub-Saharan Africa. And under his leadership, the IMF has disbursed $51 billion to support the post-pandemic recovery. And Devon Long is an investment associate at Bridgewater, where he's the co-head of investment implementation. He's a 2024 Millennium Fellow at the Atlantic Council and recently published a report for Bridgewater called Changing Sub-Saharan Africa's Growth Trajectory.
So, with that, I'll hand it over to you, Gargee.
GARGEE GHOSH:
Thanks, Emily. It's great to go on the second day because I get to reflect on all the controversies from yesterday and still tee up questions for the rest of today to answer. So, I was reflecting a lot on some of the themes and choice sets that came up yesterday, and really racking my brain to think if any of that resonated with how we at the Gates Foundation had made our initial decisions about what to fund, why to fund, where to fund. And I don't think they do. And I suspect most institutions make funding decisions on a range of incentives and thought processes. So, Gates is coming up on 25 years. I have not been there the whole time, but I actually did do a spell at the foundation in its very early days and feel connected to a lot of the origin stories. And for us, the origin story was much more personal than I think we talked about yesterday. As Bill and Melinda at that time were thinking about their philanthropy, they were seeing families around the world, in this country and internationally stuck in poverty traps.
And the question for them was, why is that happening? What can we do to help? And as they gathered experts like yourselves in different rooms around the world, the answers that came back were things like, actually poor health bankrupts families and keeps them stuck in poverty, poor education prevents families from getting on the ladder out of poverty, the endless struggle to put food on the table just to eat, let alone to engage in the market keeps families stuck in poverty. And so those were the things that we started to invest in, not so much from a palliative approach, but from an innovation approach. Is there a way to end malaria? Is there a way to create seeds that help farmers be more productive? Now, as someone who now tries to make sure our work connects to a broader development progress at times to development theory, I would say what we've done is invest in what we believe are some of the drivers of growth, human capital innovation, which Rachel talked about yesterday and women's labor force participation.
And that story we feel very good about. I think the evidence is super strong that a dollar invested in health leads to $4 of economic growth. A bit more schooling leads to increased GDP. But we do have to confront the fact that those individual drivers have not led to broad, sustained growth. And I think that is, for us, the first point of reflection. Second, why are we talking about growth now? We're talking about it because it's not happening. It has happened for much of the life of the foundation. We didn't need to talk about growth because Africa was rising. Aid budgets were growing. So, I think today I wouldn't want us to forget that the slowing growth in advanced industrial economies will have a huge impact on all the work we do. Just look at the news of France's aid budget cuts from earlier this week. Trade barriers we talked about briefly yesterday, but also the overhang of debt burden, the unwillingness of the international community to take action on that creates the conditions that will make growth harder.
So, point two for us, I think, is that the system isn't set up to deal ironically with low growth moments. We don't have great backup plans, safety nets, if you will, in international economic cooperation when ODA goes down, when debt is where it is today. And that's super important for us. Third, what are we thinking about now? How are we thinking about making progress? So, I guess first, we remain super committed to the drivers of growth that have defined us from the beginning. And I wouldn't want this conversation to suggest a swing away from investing in human capital, the importance of innovation that will remain really important. We've added on to that investments in what I think of as the new infrastructure of growth, you heard yesterday the importance of digital inclusion. That's a huge area of focus for us. I think in the pandemic, we saw the safety net benefits of that. We also believe digital connectivity, the digital stack, will be an important driver of growth in the future.
We continue to invest in innovation, not just in advanced industrial economies, but tens of millions of investments into the developing country vaccine manufacturing network to strengthen Indonesia, Indian vaccine supplier and the innovation ecosystem there. We'll do the same on AI in Africa. I do think there are a number of questions yet to be answered about future growth models. So, I'm happy to be having this conversation in a research setting. Because I don't think the growth prescriptions from 20 years ago, maybe even 15, ten years ago are exactly what will fit the bill today. I think so much has changed in a sustained way in labor markets, in job patterns, with technology, with AI, that we do need to refresh the thinking of the economics profession and more on growth. What I'd close with is just to say that for me, the most exciting investments, the most exciting conversations we're having now on growth actually aren't running through, present conversation accepted, aren't running through Washington and London. But are actually happening in Jakarta and Singapore and Brasilia. And I think that ability now to think of the development story in a way that amplifies and mobilizes the middle-income country story, brings that more to low-income settings, is something we're very excited to invest in. Thanks.
EMILY OEHLSEN:
Thank you, (INAUDIBLE).
ADNAN KHAN:
Thank you. Really great to be here. So, I completely agree with the major emphasis of this whole summit, the importance of growth, and that we need to prioritize growth. The question is how? As far as the importance of growth in the famous words of the growth commission, growth can lift people and mass from poverty and misery. Nothing else ever has. So, the real question is, how do we do this? I remember in my ancestral village when it first got electricity and wrote many years ago, I could see an instantaneous change in the aspirations of people. They could compare themselves with people in the first world, people in... And in that case, how different are we from, say, people in Islamabad? They said they have light. We have light. And within one generation I could also see huge implications in terms of human misallocation, of human capital. And that people who are much smarter than me were starting to get into more productive jobs, who were stuck into jobs that were less productive or immediately starting to get within one generation.
I could see that. And I think the key question is nowhere in the world people do not prioritize growth. The question is how. The question is also for the international community to realize that the agency for growth and for development lies with the citizens and governments of those countries, and not with us, not with people from the outside. Outside actors do have a role. I think the most important of those roles is do no harm. I think that's often said, not always respected, especially when it comes to questions of rigidity. Let me say a word about UK policy and since you invited me on that one. UK FCDO and defeat in the past has in my admittedly biased way played a very important role in global development. With the new government that we have and the currently highly fiscally constrained environment, they are rightly a focus on macro and policy stability. They are rightly a focus on growth in the UK also. But the language that we used, the expression that I used, are very consistent with international growth and development in that the focus is entirely on targeted and inclusive growth that's also intellectually and morally consistent with the choices that UK is making internally. The (INAUDIBLE) has prioritized economic growth and development in Africa in particular, as one of the top priorities. We're seeing lots more discussions going on. (INAUDIBLE), who many of you perhaps know is leading a review of development where growth... I can't prejudge, but I know from the from the consultation that economic growth will play a very important role. And in preparation for that, we are already doing a lot of work on inclusive growth diagnostics, on what different countries in different parts of the world need to do to promote growth and how we as outside actors can support. But it's also a question of like, it's not just the level of funding, it's also how we spend it. For UK, it is critically important that we catalyze our funding. We do catalytic investments and in how and where we fund it. So partly when it comes to level of funding, I think Abe will say more about how developed countries.
And how we can sweat our assets at the IFIs, at the bank and the fund in order to make more funding available for developing countries. I'll leave it to him to say, I leave it to Paddy to say more about what the UK is doing in terms of British international investment, catalytic investment in the rest of the world. I don't want to steal your thunder. But what we are doing also is not just country specific support. Global public goods. And I'll come to some of those in a minute. But also supporting where we see windows of reform. And Stefan is here. So, like where we see elite settlement, where we see elite settlement for pro-growth coalitions emerging, how do we support those. But it's also like where we they do not exist. How can we still support through investing in the drivers for growth through girls' education, women education, many other things that can still are important for us to... What we are also doing is on the making some catalytic investments in sector-specific investment to enable structural transformation in many countries.
One of them is Manufacturing Africa where we are trying to promote more manufacturing in Africa, I think if I remember correctly, we have 100 in the last few years, we had 156 deals worth over 1 billion. I think about 36 of them have already reached financial close. So, a lot of things that we are already doing, there are a lot more things that we could do, including in supporting governments, specific sectors, promoting exports, other areas. Let me end on one thing that was mentioned yesterday by my friend Arvind. So, the nano aspect of research which is... I personally find that language slightly unhelpful in the sense like, I think what is important is high quality, good research on policy relevant questions. That could be a macro question. That could also be a micro question. And we at FCDO fund all of those kinds of research. So, Andy is here. He founded the growth research. We Fund impact evaluation at the bank at the time when it was not prioritized by the bank itself. We fund macro research at the IMF for low-income countries.
We fund all kinds of other research. We fund inclusive growth diagnostics. We fund organizations like the IGC who have like long term, in-country, trustful relationship with the government in those countries that can supply government with support on issues demanded by those governments. So, what is important is, I think, high quality policy relevant research. It could be macro, but it could also need to be strong micro foundations. And whether it's narrowly in the category of growth research, I'm not entirely sure. So, if you run a regression between the episodes of growth in the world and the contribution of growth researchers, I'm not sure we'll get a very significant result. So, yes, growth has happened because of people like Manish and others, like private sector people, market forces by other actors. And yes, we need to devote more research on this one. But I'm not sure that research is only in the narrow area that some people think are growth relevant. Just to give you an example.
So, Karthik recently came up with a fantastic book on accelerating India's economic development. Great book based on all kinds of areas on building state capacity. That's high-quality research on a fundamental, important macro growth question based on micro foundations. That's not nano research for me. So, give you another example. I worked for eight years with the government on supporting, designing, helping with them, working with them on their public procurement reform. That's not narrow research for me. So, I think what we need is good research on policy relevant questions on both macro and micro questions. Which are connected to policy makers. So, the best minds to work on the most important questions connected to policy makers. So, I see Leonard here. So, Leonard's work is one of the most transformational that I've seen. That's not nano research for me. So, what we need is the best minds to work on the most important questions connected to the world of policy. Policy actors in real time.
Where policy influencing doesn't come ex-post after the research has been done. But in some ways like inbuilt, ex-ante. In other words, is endogenous policy influencing is endogenous to the production of high-quality good results. Let me stop here.
EMILY OEHLSEN:
Fantastic. Thank you.
ABEBE SELASSIE:
Thank you. Great to be here with you all this morning. Everybody's been invoking Arvind, so I want to also say that I had prepared notes like he had, but I can't help but react to what's being said by others, so I'm going to drift away a little bit from that. So, on the point about growth, I mean, the main focus will be on the funding squeeze that we see going on. And I think what I see as a breakdown in the development finance architecture, I'll come to that later. But for... Just I wanted to comment a little bit on the growth story, particularly from an African perspective. And how I see this period that we've gone through from high a period of very high growth in between 2000 and 2020 or so to right now, where growth is very anemic. I think we are... First of all, I think as always, kind of there's not enough appreciation of the heterogeneity of country circumstances in the region. So, this has been a period where we've had fantastic growth outcomes in quite a number of countries, but more so that we've had tremendous development progress.
When I look at what has happened, I mean, this is a point that was made by Charles Kenny way back. But when you look at what has happened to life expectancy, to maternal mortality rates, child mortality rates, there's been tremendous, tremendous progress. So, this last 20 or so years where debt has gone up or other macro policy indicators have not been as well, has not been a period that has been lost even in countries where growth has been anemic. So that's the first point I want to make. Second, what was behind the strengths that we saw, which was a bit more general in that period? I want to just put on the table three more meta considerations. One was it was a period of relative peace and stability. So, and countries because the financing constraint was a bit more limited, we're not going about creating policy induced distortions. So again, to quote Arvind, countries have stopped doing stupid shit, as it were. OK. So that was minimal because the financing constraints were not there and monetary printing etc, had been minimized, etc... So just, so that's an important factor that facilitated quite a backdrop for growth.
Second one of course is external environment. He also touched on it. There was a lot of aid flows, but more so the fact that there was a lot of global growth and a lot of investment also flowing to the region. It was a period where the financing costs were relatively lower. So that I think did contribute to the period of high growth. So, we shouldn't underestimate this. How important the global environment was in terms of creating conditions for countries to grow, investment to flow to the region. And then the third meta factor also, which I think continues to weigh on growth or the development challenges the country faces, demographics. So, I cannot help but think the more I've been traveling around the world beyond the region and looking at economic history, just how much of what we see now as these periods of growth. And then associate them automatically to good policies was also partly driven by things like the demographic dividend, the demographic wage that the countries have been going to.
And right now, in Africa the dependency ratio is extremely high. You have a lot of young people outside the workforce and the amount of investment countries have to make the youth bulge that's coming. That's one of the reasons why we're seeing huge challenges, as governments have to have to spend quite a bit of money on that. But also, just the fact that the share of the working age population relative to total population is not as high. And as that improves, things will turn. Now turning to the funding squeeze that countries are facing and how the last 4 or 5 years have played out. And something that we've, of course, been trying to work and defray as much as we can as an institution. I'm struck by just because we're a little bit at the coalface in terms of the work that we do as an institution. We're the ones that go to that governments turn to when they have this financing problem, and we have to go and help them think through the budget. What may be affordable, what is not. What the macroeconomic consequences of pushing the boat out would be... it really has been distressing to see we talk about a lot about the SDGs and how governments need to improve all the indicators in there about teacher to student ratios, et cetera. Right now, we are working with countries in the Sahel, but also other countries in the Sahel is particularly financing constrained. But other countries like Malawi, etc., In more peaceful conditions where ministers do not have enough resources to maintain real per capita spending for education in real terms. That is the kind of funding squeeze we're talking about. This is a function, of course, of aid flows having declined, not sufficient It's a counter-cyclical financing coming, being provided to them by institutions like mine, the world Bank. And last but not least, a squeeze that has taken place where an increasing share of resources is having to be devoted to interest payments. And of course, these kids that are going to be the given the demographic dynamics that's taking place, these are the kids that are going to be powering the global economy going forward. One out of every two new entrants into the global labor force will be coming from sub-Saharan Africa, going from 2030, 2035 onwards.
And we're not doing anything to improve education outcomes in the region as international community. Governments are doing what they can to manage this challenge. But it's I think, beyond them. So, the first point I want to make is no matter how much money IMF, world Bank put on the table now, the only way we can avoid austerity, the only way we can actually make a difference in development outcomes is for the international community to rally and put more resources in. So, one plea I have is to not accept what is happening in advanced countries as a given. Much as in the 90s and the early 2000s, it wasn't the case that people were going to see the Gleneagles moment that we did, etc. So, I think there's a bit of fatalism about the direction of aid budgets, the direction of concessional financing from abroad. And I think, it's really important to put the counter narrative and the consequence of that is out there. Second point I wanted to make, and again, reacting a little bit to Adnan is in the region and with policymakers, there is a just do not underestimate how much they relate development progress, growth outcomes to more investment in hard infrastructure, more investment in education, in health.
Because that's the that's the day to day lives. We have increasingly boisterous democratic dispensation in the region and governments have to deliver. Governments have to deliver to be able to stay in power and to carry the population with them. And the other reason why I worry about the moment is that I increasingly see policymakers drifting away from engagement with the international community. Because we're not coming up with answers as to what's going to unlock growth, but more importantly, development outcomes. So again, I think there's a need to reflect deeply about how we engage with governments because we have to be humble. We cannot make a difference in countries without engaging with governments directly. And that's the other point I wanted to put on the table. Lastly, I want to also inject a little a point of optimism, as it were. I went back to my country in 1992 as a 26-year-old and to work for government. I'm Ethiopian, and that was 2 or 3 years after the country had just come through a wrenching civil war and big government change.
And I every time I go back to Addis or, the other countries that I got to travel with when I was working for government to Ghana, to Uganda, 33, 34 years later, I'm struck by how much transformation there has been in those countries. And if you'd asked me in early, 90s if that would be possible, I would have said, what are you talking about? But there has been deep and lasting transformation. And I think going forward also, we shouldn't be too pessimistic about what is going to be possible for the region. So, I just want to end on that note. Thanks.
EMILY OEHLSEN:
Thank you.
DEVON LONG:
Thank you, Emily, and thank you, CGD. It's really a pleasure to be here. I thought maybe I'd start quickly with just giving a little bit of context about my organization. And sort of why, what are we doing? Why are we here today? And then I want to talk a little bit about, from the lens of private investors such as ourselves and the clients we represent. What are we sort of see as the big barriers to investing in low-income countries. I'm going to use sub-Saharan Africa mostly as the region I talk about. Because that's where our research is focused. And sort of what do we see as the ingredients needed for the private sector to come in at scale? So, just some quick background. So, Bridgewater Associates is a global asset manager. Our sort of flagship strategy is a global macro hedge fund style strategy. Although we have other things as well. Our clients are kind of the large major pools of capital in the world. So sovereign wealth funds, pension funds. And our approach is very much small number of clients, but big mandates and deep relationships.
And we really seek to partner with these major pools of capital and understand them and serve them. And I'd say earlier this year, we sort of launched an initiative that I've led to try to understand economic development more and understand sub-Saharan Africa as a region more. Which obviously plays today a relatively small role in global economies, a relatively small share of global GDP, a relatively small share of global capital markets. And commensurate with that is a relatively small share of what we do and what we invest in, but we're very interested in... How that could change in the coming decades. There's obviously a demographic aspect to that story, to the extent it's paired with a pickup in productivity. Or if there's at least the potential that three decades from now, the world looks very different. And we want to be ahead of that and not behind it. And in particular within that, I think we're very interested in understanding the role private investors can play. And in particular, if you look at our clients who collectively control tens of trillions of dollars of assets, and even a relatively small allocation of those investment pools to the region would be huge relative to the funding needs.
What would it really take to unlock that? What's standing in the way? And what are the ingredients? So, our organizations had a collaboration with Larry Summers for a while. He introduced us to CGD, our CEO's friends with Ajay. He got us involved in the World Bank. And then interestingly, a lot of alumni, senior investors from Bridgewater have actually gone on to do things like VC, PE or infrastructure in Sub-Saharan Africa. So, we started by really talking to them, trying to put ourselves in the shoes of the various actors here. Again, with this lens towards what is the role, what role can private investment play? We think it could play a big role, and what would it take to actually unlock that. And then I'd say a little bit wrestling with this question of like, what is we at Bridgewater given our capabilities and given our connections? Is there something we can do to help accelerate that? And of course, that last part we say with a lot of humility, this is hard. We're new. What do we know?
But we certainly wanna understand and add something if we can. So, that's a little bit on who we are. And then what I wanna share is from the eyes of private investors when you talk to them, what are like the four big things that always come up as barriers to investing in the region and increasing their allocation to the region? So, one is these big cross-cutting macro risks, things like currency, things like political risk, things like inflation risk. And I'll say on these two things are true. One is I do think for the average global investor who's 95 plus percent of their portfolio is in developed world economies, and they don't follow the region closely. For the average allocator, I think the risks are overstated in their head, the degree of these things and the worry to these things. At the same time, I do think I've seen bad analysis in the other direction of trying to rationalize away these things. I think the reality is somewhere in the middle. And I think it's just important to start by being objective and clinical about the state and then from there, you can say what's the right thing to do.
So, with that caveat, I'll comment on the probably the big three. So, probably the number one risk people highlight is currency risk. And you can see that big recent devaluations in places like Egypt and Nigeria. I do think it is interesting to actually take a country like Japan that the FX has been extremely volatile and devalued. And if you take Japan and put it on a spectrum of countries in Africa, it's probably somewhere in the middle in terms of its currency risk. So, it's easy to generalize and overstate but I do think that thing is real, and I think investors really highlight that as a thing where they feel like they don't yet really know what to do with it. So, they don't yet feel like they have great vehicles to manage it. Second is political risk where again, I think there, I think things can be overstated. Like if you talk to the average investor in the region, they're not really worried about their factory being nationalized. That's like a, that's not, that's a very dated concern.
But there are things they're worried about, and I do think like using political risk insurance is a part of being an investor there and you need to know how to navigate those things. And I think universally, they would say they love more of things like that. And then third on inflation, I think this is a really interesting one where this idea of hyperinflation looms large in people's heads. And if you just go look clinically if you look at the largest economies in the region, it's been decades since there's been unmanaged inflation. There's obviously higher inflation than there is in the developed world in a lot of these countries, though there is a spectrum across countries. But at the same time, one of the big things I'm watching and thinking about is how the debts get resolved. So, you have huge external debts dominated in a currency they can't control. Depending on how that gets resolved, that risks reigniting inflationary dynamics. So, that bucket one is like these big macro risks that I think loom large in people's heads, probably larger than they are, but also there's an element of realism too and I think that deters people.
The second is in a very obvious way, undeveloped infrastructure that makes it harder to go there, set up a factory, et cetera. I think in many ways, if you look at wages in Sub-Saharan Africa denominated in the dollar, the euro, the yen, et cetera, it's extremely cheap and competitive, but then a lot of that is undercut by what it's actually like to try to set up a factory there or do business there. So, things like you need to have diesel generators because the electric grid's unreliable or it can take five hours to get from one side of town to the other during rush hour or it can take 40 days for minerals to make it support and things like that. Those things chip away at a lot of what otherwise looks like a very competitively priced labor pool. The third is let's say a mix of institutions, governance, regulatory clarity. I was on a panel recently where I think someone put it very succinctly where they said what companies need is clear rules enforced consistently. And I think that really does hit it well.
Obviously, some sets of rules are better than other sets of rules, but just this notion that if make it extremely clear what the rules are and whatever you're applying to me, you're applying to the guy across the street, that as a foundation really does go a long way. The companies will find all sorts of ways to operate in constrained environments if they have that as a foundation. So, obviously, good governance is easier said than done, but it really is such a key thing. And then the last big thing particularly when you talk to people and things like private equity and infrastructure, is the nature and the sophistication and the maturity of the capital markets. And how that's a limiting factor when trying to finance projects in regions like sub-Saharan Africa relative to the more developed countries. And it comes through in a couple of places. So, one is how developed are the credit pipes? So, when someone saves, does that ultimately get recycled back into money that can then be used to finance investments?
And then second is a little bit of if you're from the perspective of international investor, international allocator what are the things that you really care about in order to feel comfortable allocating the region? And it's things like, is there a secondary market liquidity? How actively do the stocks trade? Even mechanical things, like are you part of a major index, makes a huge difference. A lot of allocators will invest if something's part of index passive flows and even active flows are benchmarked. So, the fact that they don't meet criteria like that really closes a lot of doors. So, I think those are the big things. And one of the big things on our mind is putting ourselves in our shoes as investors who decide where we're gonna manage money on top of our clients. And then also putting ourselves in our client's shoes, who again are these major, major pools of capital, and even a small share of their portfolio being allocated to the region would be huge. What would it look like to bring those barriers down?
What would it look like to improve those ingredients? And I think what you'd see is as those barriers come down and as those ingredients improve, investment in the region would pick up. And I think that the scale, the potential scale is enormous of what the private sector could do if it mobilized capital.
EMILY OEHLSEN:
Great. Thank you so much. OK, so we'll transition to questions, Gargee. I wanted to start with you and pick up a little bit on right where you ended in your remarks. You said some of the most exciting conversations that you're having are in capitals around the world. And so, I was wondering if you could tell us a little bit more about what is coming up in those discussions. What opportunities are you seeing that you are excited for the Gates Foundation to pursue, and what would you like to see more of?
GARGEE GHOSH:
Sure, so I guess two things maybe picking up on what some of my colleagues have said. First, what I see happening now is really focused effort to invest in development progress in a fairly urgent way. Some of the most exciting pieces that we're engaged in are the transfer of what is working in some context to others. So, let me give you an example. We've seen in India- I know you heard about this yesterday. The fairly significant economic and social effects of the digital stack. So, ID, payment systems combined with privacy and other strong regulation that has had a huge effect on the efficiency of government-to-people transfers, on the ability of women small businesses to connect to markets, connect to jobs, and information. That is a system that we're seeing lots of countries, even ahead of the international community, decide to invest in as part of what they see as the future of growth and progress. So, we have been supporting an Indonesian team to come sit with the Indian team. We partner with an organization called Codevelop that is not exporting the Indian model but trying to replicate the core elements of that for different contexts in Africa.
And so, I think while we often ruminate about the bigger state of the world in Seattle, when we are actually seeing countries take action, don't have the choice, as Abe said, to sit and ruminate, we are seeing really exciting investments like that. The second piece I would say actually does come back to what's happening in advanced industrial economies. I really agree that we cannot take the rollback of aid budgets, the increase of trade barriers as given. And I think it's a core. Somebody said this yesterday- the original business of CGD was to think about how we influence the arguments in those countries, in our countries, to care about, to have greater concern for, and to see the mutual benefit of flows like aid flows like development finance, which we need more of... And I think that needs to be something all of our institutions and more put our heads together and really remake the case.
EMILY OEHLSEN:
That makes a lot of sense. I wanted to pick up on something that you mentioned in your remarks and also that we talked about a little bit yesterday. This idea of policy windows or special moments of opportunity. Could you say a little bit more about how you think about identifying those and maybe what advice you would have for other actors in the space who are also looking for similar opportunities?
ADNAN KHAN:
Yeah, thank you. So, like many of these moments are like, called the pivotal moment, called the critical junctures, usually realized after they have passed. For instance, like Sudan under Hamdok government was one of those moments where I think that international community failed them in not responding in time. And now we're left with the mess, which is dealing with trying to mitigate the consequences of our failure not to engage in a moment, in a critical juncture. A deeper question is how do we create those moments? And that's mostly for domestic, for citizens of the country, for people with the agency, outside actors should not, but at least try not to do harm, not standing in the way. There's a lot more that we, I think partly this is also like not just in those moments, but when it comes to especially low-income countries and countries with fragility, broadly I think the international community has failed in trying and responding effectively. And partly that is also like undermining and not helping build local capacity.
Bypassing, for instance, government structures, bypassing regular structures, by creating parallel structures that further suck the oxygen out of the room, suck the talent out of the government structure, regular government structures. And yes, it is all donors want to be accountable. All donors want to have systems which are more and more like less prone to corruption and more prone to because they're in a fundamental sense. Their accountability also lies with their local citizens. But in a way that we are trying to do it through by creating parallel structures also undermines local capacity and makes the worst outcome more possible. That has happened in many, many countries. I also think that like... Now that I have the floor, can I say a few more things?
EMILY OEHLSEN:
Please, of course, you also react to any other comments that have been made?
ADNAN KHAN:
What I said about research earlier, I still hold. I also think that what we need to do far more is system-level thinking system-level research. We at FCDO try to do that. Land who is not here, like let the research on system-level education, thinking in education. Fantastic work. I think we need to do far more of that type of work, system-level work in many, many other areas. We have only been able to do more in just one or two areas. We at FCDO would want to do far more. I hope other actors can also do strong micro-founded research, also micro-research but which is also not just individual drivers but is also about system thinking. I think that's quite critical, quite important. I also think there's a lot more that we could do, both UK, elsewhere in the world, in helping countries. In a world with geoeconomic fragmentation and with increasing protectionism, I think one of the things that we could do from the outside, outside actors do have a role to play, is in helping countries develop more, like firms, countries, do more development of their exports, both through, both goods and services.
That has become increasingly more difficult over time. Yes, we have tried to provide more market access. The U.S. has AGOA, we in the UK have the Development Country Trading Scheme, but that alone is not sufficient. So, what we need is far more active measures in terms of helping countries and firms to promote their exports. There are many other issues I could talk about, but I'll wait for the next round.
EMILY OEHLSEN:
OK, to pass the proverbial mic, an open-ended question of any reactions to any of the comments so far. And then I also wanted to pick up on one thing you mentioned around. This drifting that you described between policymakers and international institutions, and I was wondering if you could talk a bit more about what bridging you think is warranted in response.
ABEBE SELASSIE:
Thanks. So, a couple of reactions. When you were describing all of the things that it was going to take to get significant private investment to flow, I was struck by, again, this is exactly the problem, I think, that we want countries to be what they're not at. So, if you want a macro-environment that's perfect, there are some countries that have it, but they don't, then to also fix the energy sector, to have clear rules, et cetera, that's exactly what countries are not able to do. And often, we have gone to these countries with a wish list of what needs to be done exactly to cater for private investment or external investment, which has not been forthcoming because it's never quite ideal. And I think this is a little bit about countries drifting away from us. And I think we have to go back to brass tacks, as it were, and really instead be making the case about what it's going to take for domestic investment, which is very low, to go up. Two, three, four percentage points more. And that will have a lot more dividend, both in terms of better development outcomes, but also growth in the long run, than chasing the proverbial external savings that are going to come and save Africa. So, I think a little bit shifting the conversation and thinking about the exact, not the exact, but the approximate changes that need to be made to facilitate domestic investment. The guy that's got a small garage to grow to, to expand, whether it's the financing constraints, is it red tape? I think I would love to see a focus on those things. And I think that is one thought that I have. Second, on international environment and what can be done. Kristalina, our managing director, always likes to make the point that the creation of the IMF and World Bank, particularly this year, which marks the 80th anniversary of the creation of the Bretton Woods institutions, that international community got together to create these institutions out of enlightened self-interest. And of course, the whole idea behind aid budgets, the architecture that we had had was also on the back of enlightened self-interest.
But the self-interest part is missing. We have to appeal to that, that if there's one thing the pandemic has taught us, just how interconnected we are. We see the migration flows that are roiling countries in Europe in particular, but also here. How making sure that conditions in countries remain as good as they can be is important. But all the more so, I think, at this time when out of geopolitical considerations, other considerations, where countries have become inward-looking and are putting up trade barriers, or other changes like the European Union, is coming up with this carbon order adjustment mechanism, et cetera, which developing countries are very worried about, even if it's in reality, it will not be increasing transaction costs, trading costs for them. They are worried about what it is that the intention of policymakers in advanced countries are. I cannot tell you the number of questions I get about the US's industrial policy. Why shouldn't we be doing that internally? Are the questions that are being done?
So, at a time when the countries have become inward-looking, advanced countries have become inward-looking, I think it's all the more important to continue thinking about what can be done to engage policymakers in the region and that their interests are being taken into account. And then one last thing I want to appeal to, or put the case for, even if we're not going to see a reversal of the cuts in aid budgets that we have seen for long-term development financing, at a minimum, at a minimum, we have to do more to do better than the cuts that are taking place through humanitarian budgets right now. And that is one of the most heart-wrenching things. The same countries that have these huge development challenges are also being hit by refugee flows. I was in Chad a year ago, and the government is spending so much money accommodating half a million refugees from the war in Sudan. And UN agencies, the government itself is not getting aid budgets. Sorry, humanitarian assistance is being cut, and more and more of it falling on the back of the Chadian government or even worse, local people who are getting together and actually providing support.
This is, I think, crazy in the world that we are in right now.
EMILY OEHLSEN:
Makes sense, thank you. Great, Devon, over to you. Again, open-ended prompt to respond to anything that you heard. And then I wanted to pick up, actually, on something that we were chatting about right before the panel started, that Bridgewater's competitors don't seem to be doing what you're envisioning at Scale. And so, I was hoping you could talk a little bit about what you see Bridgewater bringing to the table and how that might be differentiated among other actors in the space.
DEVON LONG:
Great. Yeah, so I'll react quickly. I think you made two really great points. I definitely think it's totally right that part of the puzzle is you have to meet countries where they are not as you'd want them to be. And then also within that, recognize a huge variation among countries. And there are places where, in sectors where certain types of investment are more feasible for the private sector. And things are more suitable in places where it's less and it's important to avoid generalizing. And I think your point about domestic savings really resonated as well. I think one thing I think is really interesting if you look at some of the East Asian productivity miracles of the past 40 years, places like China, Vietnam, there's obviously a lot of drivers to those successes. But one is that they had unbelievably high domestic savings rate that got recycled into unbelievably high domestic investment. I think that was definitely part of the puzzle there and one of the big learnings. And then yeah, I think in terms of what we're trying to figure out, I'd say it's really early days.
So, I want to caveat with that. But the thing I'm interested in is this idea of if you take this idea that man, there's huge piles of money in these global institutional investors. And in many ways, many of them actually have an ax or an interest in investing in the region. So, you look at like a lot of the Northern European sovereign wealth funds and pension funds have these very explicit alongside return and risk, also development mandates. And is there a way to make it as easy as possible for them to invest in say, places like Sub-Saharan Africa I think the reality is that organizations like these can be every bit as bureaucratic. And you can go through what is it like to navigate an organization like this. And there might be interest in investing somewhere. But it's like, well, there's a private equity team, but it's only allowed to invest in developed world countries. Then there's an emerging markets team, but they're only allowed to invest in things in the index. So, even if they have like an organizational goal to help finance development, there's like a very, often those things can die in these very practical things of, OK, can we actually find a place for this thing to live?
And there are other challenges too like short-termism, like it's not like a lot of managers are assessed on their three-year rolling performance and things like that, that makes it hard to invest for the very long term. So, the thing I'm interested in is, and then on the other hand, you have this reality too of, there's sort of like a high fixed cost to getting your head into, I'm gonna make a private equity investment in Kenya or Côte d'Ivoire, where I've never made an investment before. But because those capital markets are small, it might be a small investment like $50 million. And it's very hard to sort of get over that fixed cost hurdle of getting your head around what does it mean to invest in a place you've never invested before for a thing that's gonna be rounding or in the grand scheme of your portfolio. So, I do think things that can kind of figure out ways to sort of one, start with people who already know what it feels like to do private equity infrastructure on the continent. Figure out ways to sort of take what they're doing, like pull that and create sort of structures and vehicles that feel very, very familiar to the large pools of capital who otherwise have interest in it. And that I think there could be some really powerful, something really powerful in trying to bridge the capital, huge piles of money in the world getting to people who know what to do with it and sort of overcome some of these like little logistical obstacles you have on the way.
And I think the reason that I'm interested in giving our organizations is just a lot of what we've spent a lot of time doing is trying to understand these organizations, put ourselves in their shoes and their constraints. Obviously, big question around is always like, where are we gonna bring something unique to all the other work that's going on? But I'm quite interested in that 'cause it just does feel like you kind of do the simple math of like, even if you take just Bridgewater's clients, they control tens of trillions of dollars and you say, well, what if they put 1% or 2%? And suddenly those numbers look really, really big relative to the investment gaps.
EMILY OEHLSEN:
Makes sense. OK. So at this point we're gonna open it up to questions. Okay. This is gonna be hard. So, a gentleman right here gentle. Oh, sorry. Over here. Yes. So, we'll take those three and then we'll do another round. So, maybe let's start over here and work our way back. Good.
SPEAKER:
Thank you. I wanted to come back to the issue of systems thinking and to apply this to the disjointed way we think about trade policy because I think this is something that really has not been discussed of how to do growth.
It has come up of course thinking, Emily, in your opening remarks, you talked about AGOA, and that has come up yesterday. It came up in the context of aligning trade policy with industrial policy and so on. But because trade policy can also be very technical, what I find is that it tends not really to be interrogated in the way that it should be in thinking about growth. So, let me give you some examples. Adnan pointed out that the UK has this development country trading scheme for the poorest countries. Correct. However, our research have been involved in also shows that the UK after Brexit, it was very quick to replicate the EUs free trade agreement. So, with countries like Kenya, which is in a customs union that is trying to grow that market in East Africa for scale and all these things that we talked about, or for Ghana, Nigeria of course refuse to sign an EPA with the UK, but Kenya, Ghana and so on. What we find is that the UK is undermining these efforts of these countries to grow these regional markets through these reciprocal free trade agreements that it has with these countries.
But at the same time, the UK is one of the strongest supporters of the AfCFTA UK investment for manufacturing. We know the story yet, and so on, but just that disconnect between the development side and the trade side really. So,calls for systems thinking indeed. I'll give you a second example. Of course, at the level of the WTO, we know the problems with the door around that that agriculture discussions have not moved and so on. But again, researchers have been involved in showing that is having the an effect on the extent of investment in agriculture in various African countries. Take a couple of products to be very specific here. What we found for rice, that there is effect of price suppression because of the subsidies. And this is not just by rich countries, even countries like India, through its public stockholding program, we're seeing that the effect on its subsidies and the ripple effect for producing rice in African countries at the time when the urban population in many African countries, rice is becoming an important staple.
We found the same for wheat. We found the same for maize. The only exceptions were yam and cassava, which are mainly consumed in African countries are not subsidized outside of Africa. Third example I give you, we talked about this briefly yesterday, is that yes trade flows between countries of the global south is increasing, but outside of any policy framework for this, which is very worrying. UNCTAD made an effort at the beginning of the century through what is called the GSTP, not to be confused with the GSP. The GSTP, again, this is the nano aspect of trade policy. The GSTP stands for the generalized system to get preferences, not the generalized system of preferences, which is what rich countries give to poor countries. But the GSTP was meant to provide a policy-free work for countries of the south to come together, have a framework for trade and so on, that never took off, the political will, the appetite and so on. And many countries complain of dumping from other countries of the South.
If you take any African country, they complain about dumping from China, from India, from Turkey and so on. And particularly sectors that they could potentially be competitive. So, my point is just simply to say that really we do need systems thinking in the way that we relate trade policy to development and growth more broadly. And I'm not seeing that happening as such. I'm quite pleased to hear that of course, the UK government being very strapped as we all know, but I'm quite pleased to hear the review that Shafiq is leading. Perhaps there could be scope to contribute to that in some way. Thank you. So, we'll take three and then I'll let each of the panelists respond. So, while that mic is moving, maybe we could move to the gentleman over here, and then we'll come back to you just as the third.
THOMAS MUNTHALI:
Thank you so much. So I'm Thomas from Malawi. I head the National Planning Commission there. And when I listen to the panel, one of the things that comes to mind is somehow, the disconnect between what is really down on the ground and what the funders seem to be focusing on.
If you look at countries like Malawi, you would find that a lot more times the funders want to emphasize support on the social sectors. Now, the social sectors are important, don't get me wrong, but they don't generate resources. Countries like ours would want to emphasize a lot more on domestic resource mobilization that can help us to sustainably fund the social sectors. But a lot more times that doesn't happen. A lot more of the funders are looking at supporting that. And I'll give you an example that in a time like 2006 when Malawi was part of those countries that had debt relief, we advised that most of those resources have to go to education, health, water, and sanitation, and that's where we spent most of those resources. And not long after that, we are back to begging because we did not invest in the sectors that are supposed to generate resources for the country to move forward. So I think that a lot more of these funders, especially the philanthropies, you look at how they even bypass government systems to work with NGOs and government organizations and the public sector institutions remain very weak.
And because they are so weak, they're becoming inefficient. Because of inefficiencies, they become more corrupt because one wants to bypass the systems and for you to get the services faster, you've got to find a way of getting those services faster. So, I think the model, in terms of how the funders, it's the assumption that the authorities don't know what they want. They look at Africa as one that is needing charity, where you don't have enough health, you don't have enough water and sanitation, you are dying of hunger, and therefore this is what we want to help you with. But you cannot, for example, fund an industrial policy that can then help these countries to grow. We are spreading these little resources because we just want to be seen as making impact in short term, but the growth is a long term project. We've got helping these countries to mobilize resources on their own and have policies and programs that can sustainably support the social sectors over time, which is not what I see the funders doing.
Thank you. Thank you. OK, third question here, and then I'll let each of the panelists respond in turn.
CHRIS MACRAE:
Chris Macrae, Norman Macrae Foundation. My father was the economist subeditor for ending poverty, but also von Neuman's biographer. And I have a feeling that we may not be talking about growth of the right thing. Back in 1984, dad and I wrote this book where we were basically counting back the livelihoods of the millennial generation, if millennials were to be the first renewable generation. And we thought only about 1 billion of the 4 billion jobs of millennials would be like the industrial age. We'd have maybe a billion, which were very far green because perhaps half of all nations don't have any critical minerals. So, they're always going to be disadvantaged unless we do have a green economy model. A billion might be very much more community, family safety, happiness. And another billion was technology. In my father's last couple of years, he met Muhammad Yunus. And the thing which was amazing was that both Muhammad Yunus and Fazle Hasan Abed had developed models which were women in parliament, bottom up community.
So, what I am very interested in right at this moment with my friends and Muhammad Yunus is to challenge someone like Jensen Huang to develop an LLM model from the bottom of the pyramid, bottom 2 billion women empowerment models, so that we can actually see that intelligence and see if that works.
EMILY OEHLSEN:
Thank you. OK. So, I'll let the panelists, I think respond to the parts of the question that they feel most apply to them. So yeah, please.
GARGEE GOSH:
Great. Sure. Well, maybe I will take Thomas's question. So, I am conscious that Ken Opalo has critiqued us for the opposite of what you did, Thomas, in the sense of working too much with government. Why don't we work around government with more private sector systems? So that actually resonates more. We—almost everything we do relies on the primary healthcare system on the AG extension system. So, we are for us working at scale, getting out of the nano into impact at scale transforming sectors has required strong partnership with government. You're absolutely right, though, that we focus on the sectors where we know the business and are not working across every part of the economy.
I think, if I could reflect on one aspiration for going forward, it is that there is a little bit more differentiation among the funders so that everyone isn't sort of faddish doing the same thing, but we do have a more holistic way to partner with the concerns of a planning ministry, for example. Last thing I would say, in part though, sort of 75% of our work is focused on social human development sectors. We have actually over time grown our engagement with governments on the domestic fiscal picture as Abe knows very well. On domestic resource mobilization, not so much on the policy front, that is not our area, but on the mechanics, for example, of digitizing government as a way to increase revenue. We are deeply engaged on the debt aspects. But for us, that actually is a necessary outgrowth of working in the human development sector because progress won't happen, as you're saying, without unlocking some fiscal space or the potential to grow in a broader way. So, we've been pulled into that area.
We'll be a small player, but I really agree that it, it hasn't been enough to only focus on human development. It will be our niche that the delivery of development progress will be our focus. But we are absolutely part of the broader concern now of sort of growth in fiscal space.
ADNAN KHAN:
Yes. So, two quick comments on the first and second questions. So, on the first leg on, yes, you're right I agree with this trust of your comment. While UK and other countries have preferential access for developing countries, there has also been a process of preference erosion in recent areas because of free trade agreement, bilateral, and other trade agreement. That's an area of very active discussion here. I think the counterargument that is posed is, while we had preferential access, much of that access was never utilized in the first place. So, the question is, what is stopping that from happening? Should we continue with the same way of preferential access or should we also think of active measures to promote exports or other measures from local firms to international firms?
As I said, very active area of discussion, if you have thoughts on this, so please do share that will strengthen our internal discussions. So on the second, yes, I completely agree with the thrust of the argument. I think the key thing to think about is reimagine how we think about growth and development and move away from a concept of charity to more of investments. And think of Africa also, I think the increasing demography in Africa is not to be dreaded, but also to be seen in a world where we have falling demography, fertility in many other parts of the world, seen as an asset, as a human capital, as a source of human talent that is to be celebrated. I think the key question is what Abe said, how do we invest in health and education? How do we invest in building that human capital? Let me stop.
ABEBE SELASSIE:
Yeah. So maybe I'll also react to Thomas's question. And I would want to make a distinction between what happens on budget and what happens off-budget. So, there has, in general, been for countries like Malawi, other low-income countries, the amount of budget support has been declining.
But still the case that in Malawi, probably three quarters, two-thirds of spending is financed by domestic revenues, right? Taxes. And it's only really the quarter that is financed by borrowing increasingly and less and less by concessional financing and almost zero grants these days. So, to my mind, I think first, I'm always struck by just how much governments have so much agency and don't use it. So, as I said, three-quarters of the budget, probably a bit more is being financed by domestic revenues. So, the government should be dictating how it's allocating those resources, OK? Because the lion's share is coming from government now. That's a general point I wanted to make to you. On the broader point about what the international community can do to strengthen Malawi. Of course, one unfortunate thing is that increasingly governments have been-- So, aid has been drifting away from going into budgets and instead going more to projects, the gap being filled increasingly by borrowing. So, I think that's something that's really also really incumbent upon the funding agencies to rethink about.
Again, 20 years ago, the whole idea about the development compact was more and more resources being channeled through budgets which are gonna be going through increasingly parliamentary scrutiny, public process. Now, I think that's been abandoned and eight budgets have been cut, but also what remains is increasingly outside the process. And of course, resulting in countries having to borrow and exacerbating the debt challenge. So, that's the challenge I see. But I think we underestimate just how much agency is within governments and the need to be a bit more aggressive on that.
DEVON LONG:
Yeah. I wouldn't say I have a ton to add. I do think your point on domestic resources is totally right factually in terms of what a big share that plays in, in financing in these countries, and as well as sort of the government side. I think I'm also interested in the idea of creating structures and this idea that domestic savings can also be recycled into domestic investment. And that's another huge pool of domestic resources that can be mobilized.
'Cause I agree, the reality is, if you look at it, I think one of the most impactful things that people on the stage can do is kind of like set the wheels in motion that allow countries to, through their own capital markets, through their own tax base, to finance those things. And I think that gets you to more this notion of investment versus charity that I think is really powerful. So yeah, I think your point's really, really well said.
EMILY OEHLSEN:
Great. OK. I think we have time for one more question, and then maybe we could do a rapid-fire round.
SPEAKER:
Thank you. This question might be partly aimed at Thomas from Malawi, but would be interested to hear the funders responses as well. Honestly, a lot of what USAID has been pivoting to do in the economic space is actually exactly what you just laid out, which I think should be very obvious to all of us. That domestic resource mobilization and supporting the growth that you need in order to have those resources to actually be able to fund your own services rather than funders funding those services in perpetuity.
I feel like that logic's very obvious. Maybe the organizers may have planted you in the crowd to say what you said. But I think part of the gap for us is kind of thinking through how, as USAID or others here, how can we support those, let's say strategies for economic transformation. And what is the mechanism for that? Is it most helpful for us to be trying to have technical assistance, to have embedded advisors in Malawi or elsewhere? I think a lot of times, funders end up doing these analyses to say, here's the constraints to growth, and then here you go. So, would love to hear from the funders and maybe Thomas what you think funders can really do to sort of bridge that gap.
EMILY OEHLSEN:
Could you pass the mic to Thomas in case you'd like to reply and no pressure, but I'll let the-- Yeah, Thomas, why don't you go first and then we'll have the--
THOMAS MUNTHALI:
Yeah, I know. She's put me on the spot.
SPEAKER:
Yes, I'm sorry.
THOMAS MUNTHALI:
But I think the issue is that countries like Malawi have defined their growth pathways. We, for example, in Malawi, we have a vision that has been clearly set out on wealth creation and safe reliance, and it's got defined strategies on how to get there.
One of the four areas is we want to make sure that we promote agriculture, tourism, mining and tourism, ATM. But in that we need economic infrastructure to support that ICT, transport, energy and so on, and the policies that have to support that. So, when we engage USID, FCDO and so on and so forth, oftentimes we're told, look, we already have a strategy that is spanning between now to 20, whatever our focus is on health and education and stuff like that. I think we need to be able to look at the countries that we're supporting and cut our support based on what the priorities of those countries are. So, to me, the key issue is to have effective engagement with authorities in terms of what is it that you would want us to support you with in terms of moving forward. Instead of just continuing business as usual because this is what we do, this is what we do in other countries. So Malawi is not gonna be an exception. And even the language of wealth creation in Malawi is becoming a lingua.
We no longer talk about poverty reduction, because we don't believe that the communities are going to really move forward if we continue to give them handouts and stuff like that, because the mentality of poverty deduction is something we want to go away with. We need to be creating wealth so that we can fund our development agenda on our own. Thank you.
EMILY OEHLSEN:
Great. We are at time, so I actually suggest that we wrap here and we continue the discussion in the break. So, thank you everyone for being here. Thank you to our panelists. Thank you to the people who ask questions. We have a 30-minute break now, so people should head outside, have some coffee and food, and then we'll be back here at 11. Thank you very much.
- Adnan Khan, Chief Economist at the FCDO, and Professor of Public Policy at the London School of Economics
- Gargee Ghosh, President, Global Policy & Advocacy, Bill & Melinda Gates Foundation
- Abebe Selassie, Director of the African Department, IMF
- Devon Long, Co-Head of Investment Implementation, Bridgewater Associates
-
Moderator
- Emily Oehlsen, Managing Director, Global Health and Wellbeing, Open Philanthropy
Coffee Break
10:30 – 11:00 pm EDT
Horizontal, Vertical, and Cluster Approaches to Growth
11:00 am – 12:30 pm EDT
MARK:
OK, we're going to start up again. Now we're going to talk about Horizontal, Vertical, and Cluster Approaches to Growth. And Jeff Mason from CCI is gonna to be our moderator. Jeff, over to you.
JEFF MASON:
Alright, thank you Mark. Thanks everyone. So, when we talk about growth, and we've heard this already, this means a lot of different things to a lot of different people. It directs us to different levels of action. So, right, at one hand you have the decisions being made by individual firms in response to the incentives that they're facing. And you'll hear about that after lunch. Of course, at the other end of the spectrum, right, you have the big sort of macro decisions being made, basic rule of law, these kind of really big picture things. But there's this wide berth in the middle where we can really start to talk about concrete examples of action, things that are being done, that we can learn from, that we can replicate to drive growth. And so that's what this panel is gonna try to dig into a little bit and start getting into the, OK, what do we do, what have other people done with regards to growth? So, each panelist is gonna give an introduction for several minutes to a specific project, investment, policy, something that they've worked on that's been an important driver of growth in one form or another.
And then we'll go into a discussion and how what they're doing relates to this central theme of growth. So, joining me for this discussion, we have Piero Ghezzi. He's the former Minister of Production of Peru and is also the founding partner and CEO of GPD Partners, which provides private credit to mid-sized agribusiness firms. We have Ahmed Khalid Benomar. He's a senior advisor to the Minister of Economy and Finance of Morocco and has worked on the TangerMed Port and industrial project in Tangiers. We have Solly Angel. He's the Professor of City Planning and Director of the Urban Expansion Program at the Marron Institute of Urban Management at New York University. And finally, we have Aradhna Aggarwal. She's senior advisor to the Trade Technology and Skills Team at the National Council of Applied Economic Research in India. So, thank you all for joining me for this discussion. And, Piero, we'll start with you.
So, during your tenure as Minister of Production in Peru, you pioneered a new approach to private sector, public sector collaboration. And this is something we've heard a lot about, I think, in sort of general terms, right? Public and private should work together to facilitate growth. It's not purely an exercise of one or the other. They need to work together, but it's important to understand what does working together mean in sort of real terms and how can we do that productively? Because I'm sure plenty of people in this room, you've been to some sort of public-private meeting, dialogue, whatever, and you probably left that thinking, what in the world did this accomplish? This was a waste of time. And so, right, but we need to have those conversations, so we should have them productively. And that's something that I think you tried to work on as Minister, Piero. So, please tell us about that.
PIERO GHEZZI:
Thanks, Jeffrey, and thanks very much for the invitation. Yeah, I'm gonna talk about Mesa Ejecutivas. It's an instrument for industrial policy or product development policies, as we call them euphemistically in Latin America, that we designed and implemented while I was Minister of Production of Peru between 2014 and 16. Mesas was a very practical approach. My background is in international finance. Until 2013, I was Chief Economist of Barclays globally, so I had not a background in economic development, so I was not so invested. So, when I became Minister of Production, we had launched a productive diversification plan, and now we had to implement and choose a sector, etc. So, our reaction was to hire McKinsey. You know what I mean? An international consultancy firm, right? That was the first reaction. Upon reflection, we decided to convene the main players ourselves, particularly private sector guys who had shown some interest in working in this public-private collaboration, and start solving problems as opposed to studying the problems, just studying the problems.
So, we started to work from the very beginning, and basically, in Peru, there were like 200 working groups and roundtables and multilateral commissions, etc, that didn't work. So, basically, we analyzed them and multiplied everything by minus one, and we did the opposite. So, three or four characteristics had these working groups that didn't work, in our view. The first is that the private sector was only an occasional guest in these commissions, as opposed to a permanent active member that participated in the co-creation of solutions. So, we invited them permanently. The second is that the public sector invited in these commissions, many times, are the guys officially designated by the entity, maybe the COO of the entity, but not the guy who knows about the issues, about the problems, and who has to sign at the end. So, at the Mesas, we invited them, the right guys, the guys that should know or should know about the problems and have the responsibility to sign whatever is needed. Also, we had a dedicated team.
This is very important. Somebody whose main job is to work with these Mesas, not something that they do on top of ten more things. They may do other things, but the most important thing they do is Mesas Ejecutiva. So, we had this dedicated team. And the fourth thing is that in these traditional working groups that Peru had, there were votes and minutes. It was too rigid. And also, because we wanna do the right thing, not what the majority, right, want. So, we eliminated the rigidity. And three more things about what a Mesas Ejecutiva is, first, we have two bodies. The low-level body, the guys with the contextual knowledge, the guys who know the problems, right, and are in charge of solving those problems. That includes the private sector, the public sector guys, and the dedicated team. But some problems cannot be solved at a more technical, low level. So, it have to be elevated to the cabinet-level ministers, right? They have the ability to allocate budget, right, they convene the right guys, solve problems that are with some political decision, etc.
And so, we have this combination of bottoms-up and top-down. Neither of those, right? What's the combination of things? The other stuff that we did is that we start working, as I said, we spent time in writing long reports or having a very detailed roadmap that had to be executed later. We started working with three or four solutions from the very beginning, and that helped a lot. And also, in addition to the Mesas, right? So, the Mesas name is wrong. In what sense? You think of a Mesa as an institution, as a table. But the Mesa is a technology. It's a methodology to work, right? To have a process of solving problems, right? So, we had, in addition to the plenary sessions, if you wish, of a Mesa, we had a lot of bilateral meetings, right? One-on-one or smaller meetings, where the problems and solutions identified in the plenary session of the Mesa are worked out, OK? So, we had these plenary sessions and these intersessional meetings with a lot is being done. I would say the majority of our work is in these smaller meetings.
So, because of the way it was worked, the private sector guys were used to this waste of time, all these Mesas that were at the round table, they were invited and they didn't get anything done. So, you go to ventilate your problems, your frustrations, and then you go and nothing happened. OK, they called them Ejecutivas. So, initially, we didn't have the last name Ejecutivas, because we executed. So, they called them Ejecutivas. The model has continued in Peru until now. I left in 2016, so it's been eight years, with seven presidents, 14 finance ministers, so the Mesas have continued, which is a testament of the institutionalisation of the issues, right? OK, so when I was finishing the ministry, only then that Chuck Sable came to Peru, and we realized that the stuff that we had done resembled significantly the stuff that he had been writing about, experimental government, experimentalism, etc, and some of the more industrial policy that he had been writing about. But I was not fully aware of that literature.
Fully is too much. I was not aware of that literature, really, because my background was more of international finance. So, we did what we worked in practice. At the end, the Mesas' main issue is try to solve the main coordination problems that government have, the private-public coordination problems, because the public sector underestimates the complexity of the problems. And the private sector may know the problems, but they don't know about public policy. They don't know the solutions, right? And also, the easiest way is to ask a subsidy, right? Because it's a lot harder to co-create and to work on working on solutions, etc. So, it's a lot easier, give me an exception, tax evasion subsidy, and that's a lot easier, right? So, this sort of public-private, and they don't trust each other. That's your stuff. And that can been visiting throughout Latin America, and it's a characteristic of all governments. The public sector thinks that private sector are just lobbyists, and the private sector thinks that public sector are just lazy guys who don't get anything done, right?
So, that was one thing that we tried to solve. And the other stuff that is perhaps more important, at least the public-public coordination failures. Why? Because the government entities work as watertight compartments. They don't acknowledge the existence, pretty much, of other entities. They work as if they were the only entity existing, right? Even within my ministry, the two vice ministries had nothing to talk to, they didn't talk to each other, let alone the entities that depend on the ministry, right? The independent entities. So, and this is worse, because a lot of the coordination failures are local, but the solution may require national decisions. So, you have this not only between government entities at national level, but between entities at different levels of government, right? And this has become even more pronounced over the last years because better standards globally, environmental, social, labor, cultural, whatever standards, have resulted in new entities, a ministry of culture, a ministry of environment, a ministry of social issues, etc, so that the number of watertight compartments have become even bigger, right?
So, that need for coordination. So, the Mesas were totally directed to try to solve those issues. In terms of what will be the main takeaways for me about the Mesas, I want to do more things, the takeaways and then something that I hear, let me talk about something I heard yesterday that I think it should be qualified, right? I think precisely because Peru has weak government capabilities, you should do this sort of industrial policy. Why? Because the problems exist, they need to be solved, and that more typical industrial policy of picking winners and subsidizing them is just too expensive and doesn't guarantee any success. But the Mesas allow you to do a few things, I guess. The first, you leverage. So, the public sector leverage on the knowledge of the private sector, right? And also, to be sitting in the same place allows you to do two things, align the private sector and the public sector in a mission. So, public sector, there's a mission. We need to make sure to export shrimps to China.
So, we need to open the market for that, and we need to do everything required to do that. This is like a Mazzucato type of mission, right, that I think is interesting. Also, it becomes evident what public sector employees are lazy, don't want to work, have a wrong mentality, don't have an idea, everything becomes evident. So, it really breaks the inertia that is natural to the public sector, and it really allows them to work together. The second thing is that over time, there's a lot of learning by doing. So, you not only solve problems, but you learn to solve problems. So, I think that was probably the main contribution of the Mesa, is just that we design a new instrument, but also, we solve problems, and in the process, the learning process was super strong, right? It's super important. Also, as the views, what's interesting is that we have a Mesa for mining. So, initially, the mining ministry and the environmental ministry had very different views. Over time, they're working together, really. They coalesce, right? The view became one, and that has allowed continuity, because if you have ten finance ministers or ten energy ministers, to have a Mesa allows a continuity that survives the different administrations. I think that's super important, this idea of it's not written in law. Actually, the Mesa's program was only created five years after they started. So, it's like, I think, like bridges, right, what is building capabilities? You don't create institutions to do, but you do first, and then institutions are created over time. I think that's super, I mean, when I read the book after I finished the Ministry of Production, really, a lot of stuff really resonated, because that's exactly what I experienced, right? To finalize. So, and also allows to use very scarce resources. What are the two most scarce resources, in my view? One, capable government bureaucrats. Second, bandwidth of the high-level cabinet, right? The time of the cabinet-level guys. So, you optimize, and you are going to solve these problems.
You prioritize, in a way, implicitly or explicitly, if you wish, and it's also a very cost-effective way of doing industrial policy, because you don't need to spend a lot of time, right? Because a lot of times, there's wrong regulations, right? A lack of coordination between different government entities, right? That they don't enter together, contradictory requirements, etc. That really is the cause. What's really the orange juice and the sandwiches, right, in the meetings. Really, you don't need a lot of, over time, the Mesas have become more expensive, the way, because we have created infrastructure, but in a very informed way of prioritizing the public budget, right? So, that was super interesting. But the ten takeaways for me. First, have the right guys in the room, right? The right guys on the bus. See the right private sector guys, the right public sector guys. The first thing. Next, start doing, instead of spending a lot of time creating all this paraphernalia and all this infrastructure for the quality system, and for competitiveness, all these Consejos Nacional de Competitividad, just start doing stuff, and the other stuff will come, right?
The third, really go against the human nature of thinking linearly. Think recursively, right? Because it's impossible to have a diagnosis so detailed that it just has to be implemented. You will learn a lot during execution, and then you will go back and forth between diagnosis and execution, right? You have an initial plan, but it has to be preliminary. Work on a productivist approach. I think it's very important. We, at least at the very beginning, we said, subsidies and exceptions are not discussed in this table, because otherwise people will go there immediately, right? The natural thing to do for a private sector. Fifth, keep an open architecture. So, no, we have a very rigid cast of the same guys. The problems keep changing. So, convene the guys who know the problems, not the guys who are just the general managers of the main lobby, right, the association, right? Make sure also the learning cycles are short. So, as a minister, it's very easy to fool yourself that you did your job because you passed a law, or you allocated a budget, right?
But that may have no right implication, no impact at all at the context level. So, try to make sure that you have the problems, right, that you identify the problems, and get mechanisms to really learn and shorten the learning cycle. Sixth or seventh, I guess, seventh. Just make sure you can elevate problems, because this idea of combining that contextual knowledge of the guys who are on the ground and know the problems with the power of the ministers, of the cabinet ministers, that have been the president, is super strong, right? You need to be able to elevate problems. Otherwise, things stay very small. Not only development, if you wish, right? If you are not able to elevate problems, the problems that you can solve become smaller. Eighth, have really a dedicated team. This is very important. The very best public servants should be in this small group, and the group that we had didn't have more than eight or ten people. It's a small group, but very good guys, and very transversal. So, the different Mesas were seen by the same people, because there's a lot of, right, knowledge that goes.
PIERO:
That is very transversal. And make sure that these guys are housed in the right place. It's very tempting sometimes to have the guys in the private sector, I think. But but normally the private sector... But they don't... they will not have the knowledge or the power to really to make sure that you move the public sector. So normally it's better to be in the public sector. And when I left the government, they moved from the Ministry of Economy or Production, which is where I was to a minister of finance. It was a lot better to be there because then the Minister of Finance can really help allocate budget and really give direction, right? I mean, Minister of Transportation, you need this, OK? I'm gonna give you money. Right? But in exchange, you're going to be doing that, right? If you don't do that, it's OK. But you need to be cognizant of the limits of having—the time is up and I will finish in one minute. And the last one, I think is what I said before. Just make sure to remember the measures are more like a methodology or technology to solve problems and that allows really to use it in very different contexts, right?
It can be like very, very specific issue versus a very large issue for a more political issue or social issue or a more technical sector. So really the methodology can be adapted to very different contexts. So if you think of them as a methodology, as I said, a message is a bad name because everybody thinks that it's just sitting in a table, right? You get a lot more done. That's it. Thank you very much.
JEFFERY MASON:
Great. Thank you, Piero. Now let's jump over to to Ahmed. So you've been intimately involved in Morocco's Tanger Med project, right? This is a hugely successful port and industrial complex. And it covers a wide range of sectors. So automotive, aeronautics, food processing, textiles and many others. It's the largest port in Africa and in the Mediterranean. And in last year's World Bank's Port Competitiveness Report, it was number four in the world in terms of port Competitiveness. So there's something really impressive, I think, that has been been built here and in a relatively short period of time. I think it was commenced in 2007, 8 to 10 years later, there was another phase developed. So this has happened relatively quickly. So, you know, with your involvement in the project, what are 2 or 3 of sort of the practical factors that most led to Tanger Med's spectacular success?
AHMED KHALID BENOMAR:
Thank you very much. It's a pleasure being there. I will try to to share some some of the highlights of the of this experience. So there is something we are talking about growth and development. And for me there is something that is fundamental is the common sense. So sometimes we forget it. And when I will talk about Tanger Med and some achievements of Morocco, of the Kingdom of Morocco, there are sometimes related to that, to the being on the very ground and at the level of common sense. So I will talk about tools related to territory. One tool explain a little bit, and also at the central level, and maybe relate that to risk management also because it's important on this context. So related to the territory approach, the north region of Morocco has a very great history, cultural also cultural heritage. But it was a poor region for decades and we had some instabilities on that region also for decades, because it's the gateway between a lot of things, between Arab and Islamic worlds and Europe, Occident, also between Africa and Europe, between Morocco and Spain.
And so it's boundary zone and it's complicated. We have only 14km of sea, but it's kind of towards. So we had all the bad aspects that are related to this kind of places for decades, for example, the trafficking, a lot of issues that were there, and also the also the contraband, a lot of issues that were very famous for that reason. So it was the situation that was there for a long time. So what was the the first thing we did? And it's something that is related to the common sense. So it's the strategic vision. So the king say the issue is that you have that region like that unemployment rate problems, but at the same time, you have 100,000 ships that cross the Strait of Gibraltar. So maybe the first idea is that we have that flow. So maybe we will take a little bit from that flow. We at that time we didn't have any port on the big port on the Mediterranean. So we had only Algeciras in Spain that has the monopoly of the of the activity, the shipment activity. So the vision of the of His Majesty the King was to build that port.
So it was the beginning of the strategic vision to build that port and to have also an industrial vision to make that region an industrial hub, and also to have urban planning that is connected to that region and to achieve that in a reasonable while of time. So in 2004, when the project was launched, there was nothing. Today, as you said, as you mentioned, Tange Med is the biggest port not only on Africa but also on the Mediterranean region, which means that it is bigger than all the European ports that are in the Mediterranean region. The the region is the first car producer in Africa. The first exported sold car in Europe is coming from that, from that region. We had also improved a lot of indicators of of development and of competitivity. And also we had the infrastructure that go with that. So we have the, the, the highway system and also the first speed train of Africa that goes at 3020km. So the first thing was that strategic vision, it was necessary and it was implemented. And sometimes it's the game changer come from the common sense when you have very high as we heard yesterday, political will and the political choice was done.
But when the project has been implemented in the first year, we had some very big issues because the big projects, sometimes they attract talent from other places, not from the local population. And we still had the issues I told you before. So the second point in the regional level that come also from the common sense is that you understand what people need. So we worked from 2010-2011 on a very, very wide program that tried to understand, spent two years understanding what people need. And what we found is that state and ministries, they are just having their sectoral strategies, and they are trying to or trying to reach the average of development in rural areas. But in reality, when we go to the deep dive, we have found, for example, some very interesting things. We found, for example, that local authorities and population at household level, they say that all what was done in education, economic opportunities and health was not the priority for them. So the priority for them was the road system.
And it was not at that moment the very first priority of the government. So we tried to match that. So when we worked on the very basic needs and they were saying road system. It was not obvious, but in reality it was because it was sometimes related to filling, for example, the insecurity for women to to go to economic activity or to children, to school, to difficulties, for selling goods, artifacts, handicrafts, all that, that kind of stuff. So when the priority has switched to the road at very local level, and when the state and the government understand that he has to match a little bit with the population need, it was not easy because the ministry said, no, we have a plan, we have averages, we have some standards to reach, but we try to do that. And we we began with no money at this time and now it's 15 years later it has changed completely the face of north region and rural areas. So they reached almost the standard, the national standard level. And it was a program that began with nothing can only be 2 or $3 billion that was spent on this very, very remote areas using also new indicator of (UNKNOWN) that was for the first time not measuring access only to public services, but trying to have a balanced indicator of also the distance to the main services. So it was something that was completely new in Morocco. So the second tool here is how you make this inclusion of the people, how you make the participatory approach. But that is very the ground that that is at the very ground level and that has impact. So it's the first thing at the central level. It's my second point. I had the chance to be the head of the government delivery unit for four years. So with the Prime Minister, these tools are very important. How to deliver something that is related to what you have a political will. But sometimes, and we see that in Morocco and also other countries, some other countries, you have a political party or coalition that comes, they say they have a program, but at the mid-term they change the priorities and they begin to talk on something else. So for the first time, we decided that we have to be to be completely transparent and focused on the commitment of the government.
So we implemented the delivery unit at the head of government level, which was in charge of two things. The first thing is to accelerate and to make the arbitration with the head of government. So it means the routine daily with him, biweekly with all the committee and all the ministers involved, and to have also that ability to to showcase the results to the other ministries and to involve also. The second point on that, on that delivery unit is that you manage time because you don't have to do the job of the other ministries, but you have to follow the key timelines of the reforms and the key timelines of the programs. So it was something that was very interesting and successful. One of the biggest achievements. There are two achievements. One is related to the basic indicators. So for example, for the Covid period Morocco was a very good example I guess in the in some aspects of the management of COVID. So in 2021, after the very difficult year, we had the strongest economic growth in Africa.
It was 8%. And also a lot of indicators that were we had a very strong recovery in a lot of sectors after the COVID. So it's one of the effects of this kind of tools. But the second one also is that you are more transparent and more inclusive and also more visibility of public policies. So it's very important to focus on delivery when you you are seeking growth or development. So my third point is more related to risk management. This is also something that was specific in Morocco in this year and also in last time is related to disasters and to this kind of of of issues because as you know, it takes sometimes hundreds of years to build a city, but you can destroy it very easily. So we had, for example, the big earthquake in Morocco. We had also the flood in Libya, the tragic events also in in Gaza, Palestine, a lot of situations when a city that has long time to be built, it can collapse. So what we did, we had the earthquake in Morocco in September last year, 2023. It was very difficult to have that earthquake.
So there is something here. You can just see the earthquake happens or flood or disaster or war and you say, OK, I stop with that. I have the hands, as we say, in France, but in reality, even the these events have a tragic cost. It's an opportunity for the countries after that to rebuild better. So I think is something also that we do in Morocco. We use it for example, the earthquake of 2023 to make a program of reconstruction that were implementing all the tools. I say delivery, inclusion understanding people's needs and not only aid, giving aid to people to just survive, but also to try to understand the economic opportunities that you have in some disasters. And it's also something that is interesting in Morocco and urban planning. It's also an opportunity to better to improve the urban planning in these disaster regions. So sometimes when we talk about disaster risk management, we just talk about how to be resilient and how you forecast. Sometimes it's just God will you cannot do anything.
But there is also this reflection to have before on how you can use that constraint as opportunities. So I will stop here. I hope I was not too long, but thank you very much.
JEFFERY MASON:
No thank thank you. And actually before before we move on to to to to Solly, I noticed there's an interesting point of similarity between both of you. And this was the the focus on some sort of delivery or this action unit. That really, I think, stood out to me as, as something that can be a catalyst for sort of moving beyond the bureaucracy and sort of grudging nature of how that goes and getting things done. So maybe we can circle back on that. I'm gonna go to Solly next. So you know, we can't talk about growth and investment and all these kind of things without actually talking about the physical places, the cities, the regions you know, where that's actually taking place. And Ahmed started to get into some of this as well. Because right what the built environment with the spatial spatial dimension of a city, a region, a country what that looks like and how that's deployed has implications for economic activity, economic Organization. You know, there's a classic example that I think comes to mind the commissioners plan for New York of 1811.
So, right you know, Lower Manhattan has been settled but nowhere near the (UNKNOWN) island. And they lay out a grid, very simple grid with small plots demarcated all the way up Manhattan Island and so well in advance of human settlement, you get these very functional land markets that really could not have existed had you not done that planning for that expansion. And that has obvious economic spillovers if we continue on. And so this really, I think, gets at what the core of Solly's work is urban expansion. And so at the Marron Institute, where Solly leads the urban expansion program they've worked on a very simple but I think, elegant solution to the problems of urban expansion. I think my colleague Mark mentioned in his opening remarks yesterday. Africa alone is expected to add 1 billion new urban residents by 2050. That's a lot of expansion planning to do. I think Solly can can give us some insight here into some work that he and his Marron colleagues have done in Ethiopia and elsewhere on the issue of urban expansion.
SOLLY ANGEL:
Thank you. Thank you for the introduction. Yes. When you read a lot of reports that start with talking about urbanization. I usually give you some statistic that says so many people will come to cities in the next 20 or 30 years. And then we move on to talk about something else. But nobody actually knows what it means for all these people. Like you were saying, a billion new people are going to come to cities. OK, so a billion new people are gonna come to cities. I mean, a billion came before. Another billion will come now. So it's not. What about that? And the the interesting thing is to translate that into something that we can do. And the way to do that is to say, OK, so when these people come, they're going to have to be settled and they're going to use land. So we're going to have to convert a lot of land to urban use to accommodate all these people. Ah, OK. So if we're talking about converting land to urban use, this is something that we can really already discuss. This is something completely concrete.
There's so much land needs to be converted properly to urban use. So like, we just mentioned that, you know, if a billion people come to Africa, they need to be accommodated in some way and the way they are accommodated typically is by the densification of the existing building footprints and by the expansion into new areas. The green agenda suggests that most of them should be accommodated within the already the existing footprints, because we don't really want more sprawl, more expansion. This is more costly for infrastructure. It takes away a cultural resources and so on. However, we need to remember that not all the population can be accommodated through densification. So study that we did showed that over the last 25 years, 75% of the population of cities was accommodated in expansion and 25% was accommodated through densification. So even if it's 40/60, we still have 60% of the people that are going to be accommodated through expansion. And what are we going to do about that? So I think that, Ahmed was mentioning urban planning.
You mentioned a couple of times the urban planning was, is a profession that was created to deal with that, to prepare territory for occupation. And unfortunately, it has in the conditions prevailing in places like sub-Saharan Africa, take an example, or North Africa or Asia, Latin America, the way that cities develop and expand is not in a planned way. So urban planning is largely failed us. It didn't wasn't necessarily the blame of urban planning because the instructions that they got were irrelevant in undoable. Think of it. The plan land use. Now, it doesn't really matter what the land use is on any one piece of land. It's mostly, we can talk about mixed use. It doesn't. We don't have to segregate land uses anymore. So land use is not really a kind of a logic for planning. It says, OK, so plan land subdivisions. So you subdivide the land. So all the land subdivision laws come from the north. And they say that a land subdivision should be fully supplied with all the services, that roads should be built, the lampposts should be up, the drainage should be there, the sewage, the electricity before it is occupied.
Right? That is still the law and it never happens in any of these places. Places get settled and land Inland subdivisions get serviced over a period of 30 or 40 years. Look at the building codes. The building codes say a building should be fully constructed, built and inspected, and a certificate of occupancy should be issued into the building before it is occupied. Think about what is happening in all the places that we know. Houses are built over time they build gradually they they become. They may be a certificate of occupancy may be something that you can look at after 30 years. So none of the rules that these poor urban planners have to work with are actually workable. Not only that, they create plans while and this is where the mess comes in. While all the other ministries have got investment plans and ideas, they've got nothing to do with urban planning. And there's no it's not like the urban planners are sitting at the mess and list and saying, so I have to do this, I have to do that.
They're not even there. They're creating plans that are decorating the offices of municipalities, and they are always colorful because every land uses in a different color, which is wonderful. But other than that, it's very bothersome. So you have to think about a method of dealing with urban expansion, which is serious when you talk about urban expansion. Let me just give you a number to give you an idea of how much urban expansion there is. The city of Paris in 1810 was 11km² and had half a million people. The city of Paris now is 11 million people and occupying 2200km². So what happened is the population of Paris grew about 22 fold, and the area of Paris grew 220 fold. So the cities grow and expand. They also lose density. When you're better off, you consume more land. Again, if you compare Paris to, let's say, Lagos, Paris is three and a half times about the same population. And, Paris occupies three and a half times the area of Lagos. When its because its income is so much higher at ten times higher or more than the income in Lagos.
So as cities grow and expand population and income, explain 85% of that expansion. You know, when a city doubles in population, it increases by 70%. When a city doubles in income, it increases by 55%. So you you have this enormous expansion and you have a place like Accra that quadrupled its population in the last 2025 years and grew eightfold at the time. So you come to mayors and you say to them, the urban expansion planning here is you're thinking 20, 30% over the next ten years. No, we're talking about Lilongwe. I was talking with Thomas before tripling its area in the next 20, 30 years. What are you going to do about it? Nothing. OK, so what we're saying the only thing you need to do about it, the only thing you need to do about it, is to estimate how much land you're going to need in the next 30 years, to locate this, to find places for this land, and to identify no-build zones. You know, like, I don't I really don't want development here. I really don't want development there in the rest of the land, you create an arterial road grid 25 to 30 meter road, spaced one kilometer apart, throughout this expansion area, and you get the right of way for that grid. Now, because as we were talking before, once the place is settled, getting an arterial road through is going to cost 100 times more, and it's going to be impossible politically.
So here is an investment that you can put that's going to cost you less than 1% of what it would cost you if you wanted to do it later, but you have to do it now. So, and why would we need an arterial road grid? That gets me back to the kind of the topic of the conference, because what we need for these cities to be productive is for their economies to be integrated, for them to be connected. The reason that larger cities are more productive than smaller ones is because their economies are larger, and they function as one economy. You stopped my flow of thinking. Sorry. And where the productivity gets, gets created by all workers having access to. All jobs and all firms having access to all workers. So that's why you don't want to. Create like these large informal areas on the peripheries of cities that are like autarchic economies. I cut your hair. You. You buy my food. I take care of your children. I fix your house. But there's no economic growth out of that. So, unfortunately, I have a limit on my time. So, we have actually done that in a couple of places. We started in Colombia, we were very successful in Ethiopia, and we just completed an evaluation of the urban expansion program in Ethiopia with funding by Open Philanthropy, that showed that where we had these arterial road grids, that they had significant impacts on socioeconomic outcomes, on health outcomes, more businesses were opened. They were better connected to services and jobs. And the interesting thing is we just kind of provided the capacity for local municipalities to create these urban expansion programs. But they did it themselves. They did it themselves, and they got the funding themselves. They actually a lot of it was kind of self-generated funding because they opened new lands for settlement, which then were kept housing affordable and kept income coming back to the municipality in terms of either selling of plots or property taxes and so on.
So, these programs have worked. So, in Mekelle, which is a city in the Tigray region, which was involved in civil war, that was where the most successful place was. So, these arterial road grid created areas for industrial parks for affordable housing development. And many of those served to accommodate the internally displaced persons during the war. So, it even provided this kind of cushion you were talking about, Ahmed, about kind of risk. You create areas that then can function in a multiplicity of ways depending on how you need them. So, this has worked and the, the difference between this and other and kind of the way that the market develops, uh, these expansion areas is precisely in attention to the public goods, to the roads and the arterial roads and the open spaces and the streets that get left open when development happens. Now, markets don't do that. Markets don't create arterial roads. Government creates arterial roads. And once you create that system then development can come.
Then developers can come, then you can do subdivision, then you can do all of that. With the time allotted to me. I have to stop.
JEFFREY MASON:
Thank you. Thank you, Solly. So, let's jump to, to Aradhna. And I think you'll be able to tie all of these threads together really nicely for us with the case study that I know you'd like to discuss. So, in your career, your research, you've studied special economic zones all throughout Asia and elsewhere. And more recently, you've done a sort of deep case study on one particular, SEZ, this is Sri City. It's just north of Chennai. And there's a lot of interesting parallels that I think you were able to draw to the case of Shenzhen, which is kind of everybody's gold standard ideal of what an SEZ could be or do. So, tell us a little bit about the experience of this particular zone.
ARADHNA AGGARWAL:
Well, thank you, Jeffrey, and thank you CGD for having me on board. And I see Shekhar here, my former boss. Very happy to see him here. Well, actually, I'm going to tell you a story of Sri City. And this story, I think, needs to be told because it tells us about how an incentive program introduced by the government to attract, to mobilize private investment in city building and in growth can be so effective as a tool of growth. Well, in 2005, the Government of India introduced the SEZ act, 2005. This act triggered protest across the country. Violent protests happened throughout the country and the government lost interest and they started backtracking. Incentives were withdrawn gradually. And government was not really keen to know what the problems of private investors were facing because they actually had already invested in the beginning. In this kind of scenario. There were some case studies that stood out and that showed how sort of an approach which is so full of empathy and passion and determination can lead to a successful project of urbanization.
And this is the story that I'm going to tell you today. This city was set up by a private developer, and the city was set up in one of the most backward regions of south of India. There was nothing. It just arose in the middle of nowhere. The investor was a private entrepreneur, and he had a very successful business in the United States. But in response to this SEZ act, he went back to India to give to his own people. Well, this economy was so poor at that time, it was predominated by subsistence rice cultivation and fishing. Land holdings were very small at that time, and 73% of land holdings were one acre or even below that. Only 3% land holdings were above four acres, but 75% of land in those holdings was barren. There was no urban agglomeration within the radius of 25km in this area. The land was acquired by the private developer, and it was around 7500 acres of land which was acquired, and it covered 15 villages. These villages were actually governed by this barter system of trade because the economy was predominated by subsistence farming.
And no agriculture crop, no irrigation, agriculture failure was quite frequent at that point in time. Then there was abject poverty. People were living in mud houses. Educational attainment was very low. Women were married off at an early age and they also got widowed at an early age. This is what I was told. There was no access to basic amenities like water. There were only wells, and no toilets. Open defecation was prevalent throughout the region, so this was the kind of situation in which this land was acquired. And within, within, within a decade and a half, we find that the situation has totally changed. It has become a sort of industrial city, and it has come out as a fast-growing city in this area. Well, what is the scenario today? Let's have a look here. There are 220 companies, and these companies are from 30 countries in this city. 62,000 people are directly employed. Now, you can see, I mean, if you add 1.5 times of this, then you can get the total employment. 52% are women.
So, it's a story of women empowerment in a way. And large industrial cluster has come up in the region. And this cluster is not of textile industry. It is a cluster of light engineering industries. And within that large cluster of light engineering, there are three distinct sectoral clusters. One is of the cluster of air conditioning firm. This is one of the largest cluster of air conditioning firms in India. In addition, there is a cluster of automobile firms who are especially from Japan. And then we have a cluster of the service logistics service providers. In addition, there are companies from pharmaceutical industry, from food industry and the companies that are producing Metrorail equipments. So, this is the kind of scenario currently. But it is not only about being an industrial cluster. You see, there is a very sophisticated social infrastructure. And actually, this came before the city, it was inhabited by people. And we have this we have residential houses, and we have shopping arcades, their playgrounds.
Then there are educational institutions that are attracted. One university is there, then one management school, engineering school, international school. And then we have a number of private schools that have really cropped up in this area. The city is now expanding. Initially it was 7500 acres. Now 3500 acres are being additionally developed by the developer. But that's not all because new projects are now coming up. Two mega automobile projects have already come, and they are in the in the same region. And it's going to really benefit the whole evolution of the city. And this actually is going to also benefit the labor markets, because there is a sort of competition now. And that's what I observed there. In fact, I spent five weeks there in 2021, and I spoke with a number of stakeholders, and they involve the developer companies, employees, service providers, as well as the households. And I, in fact, collected some hard data from households. And I processed that data. And using all those quasi-experimental techniques, and I have what I found was that, uh, that a massive economic transformation is underway in this part of the world.
It is in terms of incomes, household assets and the living standards, as well as educational attainment. There is this growth actually is accompanied by structural transformation. And this structural transformation. Yesterday Kunal was talking about is not only from agriculture to manufacturing or services. The structural transformation is also about the patterns of employment. You see, we have now shift from informal to formal employment. And we have all the benefits that are that are going to these people. But what is more important to me was the shift in the structure of the society. It was a survival society. And now it has become a sort of aspirational society. And that's what really that's what really attracted me the most about this, this case study. Now the question is what worked? Why this case study worked when the government was not really supporting the project and there was so much of protest going on there. So, five things I would like to highlight here. One is the leadership approach.
Now this private developer actually was a native from the same place. He excelled in education. He got a degree in engineering from India and then he moved to the US. And in the US, he got two degrees, engineering degrees in environmental engineering. And he started his own business, as I said earlier. And this business was very successful when but when the government introduced this SEZ act, he saw an opportunity to go back and to give back to his people in the region because of the way the region was, had been so backward for over all these years. And I think that that approach, that that intention that actually worked. Normally when we talk about growth, we really don't talk about these human sentiments, you know? So that's that actually really worked. And it worked in terms of the kind of determination that he had to make that project successful. And why I am saying that is because 2008, when the city was actually notified there was financial crisis and because there was financial crisis, there was no investment and because there was no investment, there were no jobs created.
People were getting against the whole city. They were protest again. I mean, in the beginning there were no protest. But now, because there was no investment coming, no jobs created. People started getting restless at that point of time. So, what he did was he tried to attract some local firms within the city. That was not the purpose of his, but he just wanted to have something to show to the people and to get them employed. So, he had just attracted some local companies and asked them to start operating within the zone. And this is how he created some employment at that point in time. But at the same time, he tried to really upgrade infrastructure within the city. So that was a sort of determination that he had to make that place successful, that project successful. Now, this is also reflected in the various practices that he adopted. So, land acquisition model, this is very important because most of these protests were because of this land acquisition. So, he actually offered very liberal compensation.
Additional compensation was paid for trees for other assets, like wells, tube wells. But that is not sufficient, I would say. And I don't think that was very important. The important thing was that he did not uproot anyone from their habitat. So, 15 villages are still existing within the special economic zone. And then he promised a job to every single family. And it was not a kind of hollow promise. What he did was he set up a human development academy where training was given to these local people because local people were not employable, at that point in time. So, he created that academy right in the beginning. And this is how he tried to skill the people. So, I think this model really worked. Of course, there was a period of restlessness, as I just said, but it was a very short period because after 2014, the SEZ act had started taking off. Now, the third factor that I think is very important was the kind of composition of this SEZ act. It was not a service special economic zone because in India, we all know that service sector actually has done very well.
And most of these special economic zones that are successful, they are in services offering ID, I mean offering a place to ID firms. But this SEZ was oriented towards manufacturing. So that actually worked because manufacturing sector requires skills of various variety, and it can employ actually everyone very unskilled to highly skilled people. So, I think that created a kind of job scenario, a job market within the... So, I think that manufacturing matters. So, this is what the point here is then location mattered. This place was actually very strategically located. Nobody paid attention to that at that time. You see. It was actually, there were four ports around that, two airports. It was in the proximity of a highly developed Chennai city, but not only Chennai city. There is another industrial city that is very close to it, and this is Sriperumbudur. So, it is a sort of corridor of industrial development. It is not merely a sort of a special economic zone. So, this place actually became I mean, it required some sort of trigger at that moment.
And that trigger came from these special economic zones and it became very successful. And then the then the strategies. we are talking about coordination between the government and the private sector, but here the developer actually assumed the role of being a coordinating mechanism. So, he actually connected the private sector I mean, he connected the private companies, the investors with the government, facilitated the business. He developed beautiful infrastructure and employed this company from Singapore, Jurong International. They actually created the entire master plan and environment to inclusiveness. Everything is taken care of within the zone. So, business facilitation by the developer and then infrastructure of this actually became a kind of factors that attracted investors from everywhere, including Japanese investors. It's very difficult to attract Japanese investors. Let me just tell you. And this is what I tell from my experience, there are particular about standards. So, what I want to say is, I mean, there are two things I want to say.
One is that the special economic zones can unleash opportunities in areas which have some potential. So that is something which is very important. But for that you need to have the right intentions. This is important. You have to identify the right location and then you have to be dynamic and innovative. So that is very important. This developer not only provided services to the investors, infrastructure to investors, but he also went for aggressive marketing. So, this was also something that contributed to this this growth. So, I think that these ingredients are somewhat very personal. I mean some of them. But they are very critical elements of growth and urbanization and success of private investment, particularly in projects like a city development. Now this is one thing that I would like to say. And the second thing that I would like to say is that that special economic zones are still not mainstreamed in the discourse, academic discourse of growth. I haven't heard anything about special economic zones since the beginning, and funders actually have a lot of opportunity here, because special economic zones are not merely infrastructure.
You can't just create infrastructure and expect people to come and start producing. You have to have some strategy around it. So that strategic framework needs to be developed. And for that, I think the development partners can really, they can really contribute to this whole thing. And let me just final point I would like to make I don't know how much time I'm left with. Do I have time? So, I just want to talk about Bangladesh here. Bangladesh is developing 100 economic zones, 100 economic zones, in one go. And they had planned to develop all of them by 2030. The previous regime I am talking about. Now, the world Bank pitched in, and they actually engaged Deloitte to prepare a master plan for that. And I am heading the team of Deloitte. And I tell you that we began by identifying the priority zones. So, we identified nine priority zones because we thought that they could be the kind of success models for the rest of the zones. And then we actually identified what all was needed to be created.
So, what is the kind of infrastructure, how much will be the kind of revenue involved, the funding involved and how this funding would come and how the private investors would be attracted into those zones. So, this is what actually, the thing is not yet over, and the regime changed. So, I don't know what will happen eventually. But this is what the World Bank started doing. And I think it was a very good initiative. And this is what I have been talking about over these past 20 years. I am working on this topic. So, I think other funders today, we had this from Malawi, we had this very interesting comment. I really liked that. And I think these are some of these things that can really help in mobilizing domestic investment within the country. So, I stop here and if there is any question I will be happy to take. Thank you so much.
JEFFREY MASON:
Sure. Thank you, Aradhna. So, we'll move to Q&A in a moment, just with the time we have left. But I think the story that you shared was shared with us there, really incorporates the lessons that that everyone up here has talked about. The flexibility and coordination, that the mesas that Pietro talked about, we see that in the sort of planning and the sort of strategy and the execution of that particular zone. We saw the broader economic and social spillovers, like Ahmed talked about with Tanger Med, from, from this development. And we saw the impact that actually planning for growth and to create a more conducive physical environment for investment and for business and also for living, um, like what Solly talked about can produce really extraordinary results in a very short period of time. So, with the time we have left, we'll go to Q&A. Please give us your name and stand up. And please make sure that your question is a question. And try to be concise. Let's do Chema. We'll do Jonathan and we'll do the gentleman over there as well.
CHEMA TRIKI:
I'm going to cheat a bit. I have two questions. Is that OK? I have one for Piero. So, as you know, at Growth Teams, we're huge fans of Mesa as executives. And we're trying to deploy it in in Tanzania and a number of countries. But I wanted to ask you in a context where a country does not have a strong private sector, let's say you're trying to develop a new sector, and the actors on the ground are not necessarily competitive. How do you deal with that and how you bring international know how to the table in that methodology? And then a question to Ahmed, um, the story of automotive industry in Morocco is, I think, the most impactful story on the continent over the last decade. But actually, what's interesting about Morocco is that there was an active prioritization of sectors starting in 2005, with planned Emergence Maroc Automotive being selected. But there is a different trajectory. While automotive has picked up in a very spectacular way, there are other sectors that have struggled a bit.
Can you, from your perspective as an insider, what explains the success of automotive versus other sectors that have stalled a bit?
JONATHAN SAID:
Thank you very much. My name is Jonathan Said. I work with AGRA, which is an entity focused on agro-processing and agricultural development in Africa. My sense is that from this panel and also parts of the ones before is that contrary to what was also said yesterday, is we do actually have a strong sense of what does work to drive growth. There's a number of different examples and evidences from different areas. For example, from the political economy, we have the deals and development framework, which is a good sense of how to build growth coalitions, we have the industrial policy evidence, which Ahmed, you also touched on, we have delivery, which Piero you touched on and others have worked in as well, we have evidence from market systems and how you can work with anchor firms and drivers in the private sector, we have evidence on science and technology and innovation and so on. How do we actually support organizations? I'm keen on your thoughts. So, bringing all these lessons, including embedded advisors to drive progressive ministers like yourself, like Thomas from Malawi and others.
How do we bring all of this together to provide support structures to governments that are struggling to accelerate growth to unlock that, combining all the lessons of these different disciplines? 'Cause I think that's maybe not what's not happening enough. So, how do we actually channel to create support structures, to bring all of these different lessons to have more Piero Ghezzis and more Ahmed's and more... And also on the private sector side as well, where there's private sector business models like the SEZ model that you mentioned, more urban planning support for city growth, et cetera, how do you accelerate that support structure as the development community?
SANTOSH MEHROTRA:
Thank you very much. My name is Santosh Mehrotra, formerly of the Planning Commission of India and currently now a visiting professor at the Institute of Policy Research at the University of Bath in the UK. I have two questions, one to Piero and one to Aradhna. Piero, thank you for that masterly summary at the end, bringing together the experience of Mesa and Peru. But tell us something that has bothers me about the trajectory of industrial policy in Latin America. I've just done a paper for Trimestre Economico in the Mexican Farmers Journal, looking at the potential for industrial policy. Industrial policy in Latin America has gone. There's been a lot of back and forth in the last 20 years - a lot. However, the real issue, in a sense, comes down to this. You said, by and large, the private sector asks for subventions. What are the alternatives to subventions and subsidies that they are willing to accept in your experience, both in Latin America and Peru and elsewhere? To Aradhna, I have a more generic question about special economic zones in the Indian context.
Aradhna since you've studied SEZs in India for a very long time, we also know that this SEZ seems to be rather unique in the experience of SEZs in India. SEZs in the last 20 years that they have come up in India, have been used by big corporates to capture land and hold on to land and actually don't develop them. This is one question. How is it that that has been allowed to happen, and how can we stop that? Because that's the big story, not the success story, with all due respect of the one that you talked about. The second is on clusters. We have 5,500 organic clusters already in existence in manufacturing and in other activities across the country. And fortunately, we are not talking enough about how support can be given for such clusters. In late industrializers like China, as well as in Italy, cluster development programs were one of the most successful ways of these countries industrializing. We are more focused on SEZs. How can we also look at cluster development programs in a more careful way, rather than SEZs in India, where you and I know they haven't, by and large, worked?
Thank you.
JEFFREY MASON:
Maybe Piero you wanna start us off?
PIERO GHEZZI:
Yeah. Let's talk about industrial policy in Latin America. Industrial policy is a bad word in Latin America. So, much so that we call them productive development policies but it's about the same. And it reflects also the issue that the opportunities go well beyond just manufacturing industry. So, you think of industrial policy in the sense of having differentiated impact on different sectors industries. Now we have experiences of... To begin with, in the Mesa, the private sector went to a lot of meetings. So, they were very willing to work knowing that they will not be getting subsidies or exemptions. For example, (UNKNOWN) is an entity in charge of forests and plantations. But they also have to approve private investment including mining. And for mining, for the environmental impact study, you need to have some sample collect and check whether you could affect the territory. But the (UNKNOWN) doesn't care about mining. No, because they are worried about forests and plantations. So, they had only three people part-time, no guidelines, nothing.
So, all these mining exploration that has a huge sector in Peru took six months, and it has a huge backlog of stuff. So, what the Mesa did, it starts to basically create guidelines for the (UNKNOWN) to give this for these sample collect and hire people. So, you hire 40 people to start working. The backlog disappeared and the number of days moved from 180 days to 22 days. That is priceless for a big company. So, you have a lot of staff where you are able to create... For example, the labor entity was asking for metal tools for aquaculture and aquatic platforms because of the mining and construction labor standards. But of course, it's horrible if you're in the middle of the sea. So, that Mesa had to change those systems. So, a lot of staff cannot be compensated by subsidy. So, they're very willing to work together in that sense. Moving to chairman's question. I remember Ricardo used to say that Mesa work for existing sectors, but not for new sectors. And that's wrong. Actually, Peru doesn't have a shipping industry.
Sorry, it's not the shipping. A naval construction industry. How do you say?
JEFFREY MASON:
Shipbuilding.
PIERO GHEZZI:
Shipbuilding and... So, it's a new port coming. Will be the largest port in South America and the Pacific area. Will allow to go to China, to export to China from 30 days to ten days. So, that's huge. So, a big boat will be coming to Peru now that they don't come. So, that allows the ability to actually do shipbuilding and ship maintenance. So, there was a small company. The SIMA is a public entity. It’s very weak, they cannot cover this. The Mesa start to work with trying to strengthen the SIMA, assimilate new technicals, changing the education, et cetera, and actually do two things. First, attract a large partner and they attract Hyundai. The heavy industries, and now is a partner for SIMA, and also the government has some private procurement. So, there are like six boats, so they have to be built, et cetera. So, we start to attract new guys. As I said, the guys in the Mesas are not a rigid cast of characters. They move. We did Mesas for large mining companies - or they did because I'm no longer there - or for small trout producers in the Titicaca Lake.
So, that's the scope. So, it's really you can adjust the Mesas. And I think the main message, they're talking about how you to support. I think the first thing you need to believe in industrial policy in the sense that really the concepts, institutions, human capital are very global, very transversal. But the problems are very specific. So, when you move the private sector to talk about the problems, they are not ideological anymore because there was this Brazilian Pedro Malan, Minister of Finance, who said the best industrial policy is no industrial policy. It's wrong. Super wrong. Really, the problems are super specific to sectors and you need to work at that level. Once you work at that level, you really forget about the discussions. And the good thing is that when the Mesas... Finance minister tried to kill the Mesa because of some... Whatever they say, the main private lobbies, the largest companies, and the small regional governors in the Amazon region were complaining. And the one thing that I really like a lot is that these guys, the small guys had a voice.
You talk about sentiment. These guys had a voice. The guys who were actually... The roadblocks. Closing the roads in the Amazon, putting the tires on fire and closing the roads before the Mesas, are the guys who once they participate in Mesas, they felt that they were listened, they were included. There are no more roadblocks in the Amazon region as a result of the inclusion in the Mesa. Now they have a voice because the big guys can always get around the Mesa. They can always listen to the ministers sometimes. The small guys are the guys who really appreciate that, even more. So, I think for small countries in Africa, I think we just need to make sure that we convey the message 'this is tough work'. And it's very specific. We're not talking about theories of academic, works. We're talking about real stuff that we can actually show it implements. I'm here. My full-time job is in private credit, I have a company, et cetera, but I come to these conferences because I think it's important for people to listen to these experiences.
And we're not talking about stuff that could have happened, stuff that already is happening, not in Singapore, in Peru, which is important also.
JEFFREY MASON:
Thank you, Piero. Ahmed.
AHMED KHALID BENOMAR:
Yes, thank you very much. Regarding the first question, indeed, there is some... The success of automotive in Morocco is related may be... The first thing is that you cannot have lot of battles at the same time. Which means that in some other countries they try to have lot of car builders at the same time and discussions still for years, and they have nothing at the end. So, we focused on one car builder. So, it was Renault at that time. And then when it was stabilized, we try to bring orders, and it was successful. Thank God. The second thing is that we believe in, ecosystem approach. You cannot become a champion of automotive if you rely only on international or multinational companies or this kind of stuff. You need to have an ecosystem. And the choice of automotive is to go very deep in the ecosystem and to have local integration. So, the integration rate was at 30%, now it's more than 60 or 65%, including also the engines. And it's very important because it creates jobs, it helps transfer of technology, transfer of know-how, and also it improves the economic landscape with the SMEs that play a very important role.
And the third point is human capital. In industrial sectors, unfortunately in Africa, the main issue is the human capital how you manage it. So, in automotive, we were very aware of that. And one of the very important thing that was settled is to implement (UNKNOWN), which means at the same time we had the first car builder, we have a very specific technical institute in all the jobs that you could do in the ecosystem of automotive. So, there are some key factor of success, but there is also something that is related to the future. We don't have to be static if you want to be competitive in an emerging country or an African country. So, what we try to do also is to begin to shift already our automotive industry. So, now we are having the first electrical battery major plant in the African continent, and lot of also plants on that area. So, we try to improve every time because it's a battle that you cannot just have a static car, but you have to be ready to face all the stakes that you can face.
So, related to the second question, maybe, for me, I was talking about common sense. It's really a conviction. The political will and common sense they are very important. We were listening to some aspects related to urban planning. Indeed solutions for me to unleash some point of growth, just to review how you see the urban planning to have, for example, the main roads and no build zone. It's the most important thing, but with lot of documents, lot of laws, lot of regulation. You cannot achieve that. You still have that issue. So, here my point is that you need to have the political will. You have to be in the delivery approach and you have to take sometimes some simple decisions. The problem of all our ecosystem is that we work on complicate things because sometimes you try to be very focused on the theoretical part, but sometimes the solutions are on the very ground. For example, one of the things that is maybe quite shocking is that in our countries, 70 or 80% of the law or regulation were never used, even they were adopted maybe 30 or 40 years before.
So, one of the things that is related to that is that when you deliver, you have to focus on the things that go directly to results, not the lot of steps and lot of technical details that you can hand over to administrations, to private sector, but you have to follow the timeline. And sometimes you miss the timeline in education reform, health reform. You focus on lot of details, but you miss the global timeline. And for having growth, you have to be focused on the timeline and the key milestones.
JEFFREY MASON:
Solly, you wanna jump in on any of these threads.
SOLLY ANGEL:
No.
JEFFREY MASON:
OK. Aradhna.
ARADHNA AGGARWAL:
Well, let me start with Jonathan's question. In fact, in India's growth story, the worrying factor is the lack of institutional trust as a result of which private investment has not been increasing over time. Now, this is something which is very worrying. Our finance minister keeps telling we are giving so much, we are giving so many incentives, there are so many programs. Why are private people not getting into this growth story and why they are reluctant to invest in the country? So, I think the whole story actually shows that the government needs to support such initiatives by actually ensuring institutional support. And this is not what is happening. You see. There are some issues with the SEZ policy, there are demands. And I think this policy can go a long way. Because I have been actually following this policy since 2005 and actually I was working with the Government of India also at that time. So, I tell you that you see what is the problem. The problem is that if you are producing anything in special economic zones, you cannot sell it in the domestic market.
If you sell it in the domestic market, you have to pay the full duty. Now, you are having free trade agreements with other countries all over the world. But then within your country, you are actually getting those goods exported to the country with full duty paid. Now, this makes special economic zones totally unviable. So, private investors are not happy. They just want that this rule should go. They should be asked to pay only on the duties that are actually forgone because those import duties are forgone in these special economic zones. So, I think this is one of the major roadblock that is happening. But the government is still... So, they came up with a new policy. And this policy, the name changed. That's it. Nothing changed in that policy. So, everyone was working on that policy. There were debates all through the country. But what was happening? Nothing. There was nothing in the policy. So, ultimately the government had to withdraw that. So, these are the things which are not really working out because people don't trust the government at the moment.
So, I think this whole story is that you have to really create a kind of environment private sector is willing to invest. I mean, this is how I take it. But it is very important that you have to have that... It's not about just doing business things. Yesterday we were talking about doing business things means nothing. These are just indicators but actual thing is not really happening. So, I think that is very important. And this is what actually I have been writing also in my country, that how you really have to ensure that there is institutional trust to really bring it out, to really make these stories more frequent and more common in this country. Your question actually shows how much distrust we have towards private investment. And actually, this is how it has happened since the beginning, because we always thought that private investors were investing because they wanted to just capture land, and they just wanted to use that for real estate gains. Yes, I don't rule out that possibility, but you know when you have this policy, it was the first time that government gave a major incentive to private investors to invest in infrastructure development.
You agree with me. But then the government started backtracking. The government started losing interest because government finds that, oh, there is no political return out of it. You are losing support of the people. And this is where we actually had a problem. And yes, you have a regulatory mechanism. It's not that SEZs are set up and you buy the land and you can keep that land forever. It is not like this because there is this Ministry of Commerce. They keep reviewing the progress of special economic zones and they keep meeting with these people and finding out how they are using this land. And after three, four years, actually they have to get the land de-notified also. I think we have to learn by doing and we did not really try to learn by doing. This is what actually my assessment about the whole situation is. Instead we try to say that, OK, this is not working this way. So, either it works this way or it won't work. So, I think we have to see how it could work. That movement from not working towards working, that have to be made by the government.
I think that was very important thing that we should learn. It's not like this is the policy we have made, either take it or reject it. And if you are taking it, then you have to take it as it is. So, people say that, OK, so let us make some profit out of it. They start looking for some loopholes. So, I think this approach, this rigidity in this whole approach, I don't think that this is very acceptable in the country, and it is affecting not only SEZ. It's not only about SEZs, it is about overall industrial investment in the country. Now, industrial clusters, you are absolutely right. We have so many industrial clusters why to create these new clusters? But now if you look at these SEZs, many of them actually came into existing industrial clusters to augment them, to improve their infrastructure. So, whether you take Rajasthan, you take (UNKNOWN)... Like in Moradabad, Moradabad is known for the export of brass products. We all know that. So, they are the government plan to have... It is all very informal employment that is generated in that area.
So, the government actually set up a huge special economic zone there so that there is a shift of these companies, these firms into these special economic zones with all the facilities, because people were running these small factories within the households. And this was very harmful for their health and all that. So, this is what was happening. So, they created a large special economic zone. It failed. It completely failed. And why it failed because the SEZ insisted that the company should buy certain scale of land, certain size of land. They won't allow smaller company to get inside the special economic zone. Now, these all were small companies. Come on. How can you force them to buy large pieces of land? For them, the cost would increase. But then it happened this way. So, many of these companies they did not come. And similarly, there were other such special economic zones that came into the clusters. The whole purpose was to really formalize the production system. Nothing much happened.
This is what is very important, learning by doing, having this institutional trust. I think these are some things which need to be included in this discourse in addition to many other things that we are talking about.
JEFFREY MASON:
I think that's a good note to end our session on. Lunch is gonna be available right now in the back of the room. Thanks, everyone, and our panel here for joining.
- Piero Ghezzi, International Consultant on Productive Development Issues. Founding Partner of HacerPeru.pe, and CEO of GPD Partners
- Solly Angel, Program Director, Urban Expansion and Professor of City Planning, NYU Marron Institute
- Aradhna Aggarwal, Senior Advisor to the Trade, Technology, and Skill Team at National Council of Applied Economic Research, NCAER
- Ahmed Khalid Benomar, Senior Advisor to the Minister of Economy and Finance, Morocco
-
Moderator
- Jeffrey Mason, Head of Research, Charter Cities Institute
Lunch
12:30 – 1:30 pm EDT
Firms: Overcoming Barriers, Fostering Productivity and Growth
1:30 – 3:00 pm EDT
MARK PLANT:
Good afternoon. Welcome back from lunch. I hope you had a good lunch. The panelists have promised me an extremely exciting panel to keep you over the post-lunch sort of dreariness, so it'll be good. So this is a session on firms and the role of firms in growth. And it's moderated by Jonathan Mazumdar from Growth Teams. Jonathan, the floor is yours.
JONATHAN MAZUMDAR:
Alright. Yeah. Good afternoon, everyone. Welcome back. We were just talking Friday after lunch. That's sort of a tough gig, but I think we have a really special panel lined up for you guys that'll bring the energy back in the room. And so, yeah, we're keen to get into it. My name is Jonathan Mazumdar. I'm co-founder of Growth Teams. The focus of the session is firms. What challenges they face, and what can we do to help them grow? I think yesterday, Manish kind of helped calibrate our ambitions. His company, Teamlease, employs 400,000 people with aspirations to grow four or five x. So similarly, we need businesses in Africa and South Asia that get bigger, resulting in more and better jobs. I think Ken also made a really nice framing point that firms are often the specific beneficiaries that we need to design for in order to make policies and interventions that can drive broad-based growth and job creation. So, all to say, I think firms are kind of where the magic is, where the magic happens.
And so, to help explore this, get clear and concrete about what we can do to support firm growth, I'm thrilled to be joined by a really amazing panel of thinkers and doers. So I'll only introduce you guys briefly, but we have Paddy Carter, head of development economics at British International Investment, the British development finance institution. James Foster, insights director at Gatsby Africa, an organization focused on sector transformation in East Africa. Radha Rajkotia is chief executive officer of Building Markets, an organization that links businesses to buyers to help them grow. And Brendan Mullen is co-founder and managing director at Secha Capital, a growth-stage fund investing in traditional industries in Southern Africa. So, I'm gonna borrow a bit of a trick that Shruti used yesterday and start things off with a short question. So before we dive into the longer comments, I'd like to start by asking each of you to share in one or two minutes each. What do you see as the biggest obstacle or key factor in getting more large firms that create formal jobs at scale?
And let's hear the quick hot takes, and then we can move on to the longer comments. So we can go in order. I'll start with you, Paddy.
PADDY CARTER:
OK. Thank you very much. Well, I think we heard some of the usual candidates from Devon earlier - macroeconomic stability, mercurial regulatory and taxation regimes, and inadequate infrastructure. I couldn't tell you which of those is the most important, but I'm gonna bring up a topic which I think is interesting, which is the issue of labor productivity relative to wages. And this is a topic that actually CGD drew attention to a long time ago with a paper by Ramachandran, and Gelb, and Meyer that suggested that actually wages are not particularly low in Africa relative to wages. I'm about to start talking about something I don't really know a great deal about. This is all a bit anecdotal. Ethiopia is a country that, before the terrible war, was doing everything right. It had the industrial policy, it had its factories, and as I understand it, the exports weren't properly taking off, and some of those factories were struggling to produce profitably. And we heard yesterday about the importance of pro-growth elite bargains and industrial policy.
And you can have all those things right. You've got your factories in place. They're not profitable. You've got a big problem. So I don't know the answer here. I don't even know if this is really true. Like whether it's just a one-off anecdote from Ethiopia or whether it's a more widespread problem. But if it is, I think we really need to understand why it is and what anybody can do about it.
JONATHAN MAZUMDAR:
Brilliant. James.
JAMES FOSTER:
Nice. Thanks, Paddy. I guess large firms need large markets. And so regionalization, regional trade, that sort of stuff will help. The other thing is you need government support in the Mesa ejectivas type approach of solving problems. You need governments that are accepting of large firms. And all too often in the work we've been doing, governments are skeptical of large firms. They're worried about large firms, particularly large international investors. And we've got examples where we've had a great opportunity of a big textiles investment. And the government has said, "Well, it's too big. We don't like them controlling so much." And it's gone away. $250 million investment lost for that sort of slight edginess around large firms. So, I think that openness to large firms is probably key. Thanks.
RADHA RAJKOTIA:
Great. So thanks. Thanks for the question, Jonathan. So, my view. So Building Markets focuses primarily on small businesses. So we work really with firms that employ no more than around 50 people generally and are formal but a bit still small. And what we know about small businesses globally is that they're the most prevalent in terms of number. They're the largest employers in most countries. And in many low-income countries, they are also huge contributors to GDP, but they are incredibly difficult to access and support because of their number and fragmentation. But I would say one of the core things that we can do to support small businesses, and this is sort of the basis of our work, is really being able to address the market failure that exists around information, network and trust between small firms and buyers within the marketplace, whether those are corporate, public sector or even social sector buyers domestically and internationally. So I think if we're really interested in thinking about both firm growth and job creation or protection as a result of that, at the SME level, at the small firm level, then really we need to think about market access that can help bridge and address some of those market failures.
BRENDAN MULLEN:
Great. I think it's kind of evolved from very top-down policy market size. So maybe I'll kind of go bottom up. Within our portfolio, we found the companies that have kind of hit that trajectory, no longer a small business. No longer kind of just waiting. No longer just kind of like paddling in the water, but actually able to launch. It's generally cost of capital and it's market share. So, consolidation debt is expensive, and cash conversion cycles take a long time. You can get cheaper debt or cheaper capital in some way, and then recycle that more quickly, and then start getting market share. So it does go back to that TAM. But also, what we found is consolidation in a lot of these markets. And that's kind of where we hit that trajectory to create a lot more jobs.
JONATHAN MAZUMDAR:
Right. OK. Yeah, there's a lot actually to dive into. But I think that just helps set the stage a bit, and we can begin to go back and forth. And I think, as we've said, I'd love for you guys to actually ask questions of each other. But to start things off. Paddy, maybe you can set the stage for us. Yesterday, Lant sketched some of the facts of economic growth and poverty reduction. You've also written recently and extensively about how private investment into businesses has sort of indirect but very important effects on overall poverty levels. So tell us a little bit about that. Why growth is important for BII's poverty reduction objectives. Some of the common resistance or objections maybe you encounter about that link and sort of how BII thinks about prioritizing investments for impact.
PADDY CARTER:
I mean, I think we all kind of agreed yesterday that, in some respects, this is a bit of a crazy conversation even to be having, trying to explain the importance of growth and firm growth and poverty reduction. But it is something that we continually struggle to communicate to our kind of stakeholders in the UK if you will. I mean, the British government occasionally has parliamentary committees and development experts turn up to give their evidence. And they say things like, "We shouldn't be investing in grid-scale electricity generation. We shouldn't be investing in fertilizer manufacturing capacity on the continent." So there's still people that don't think what we do is development. So there is still this thing. And when we try and talk about the importance of growth in poverty reduction, the instant response, and it's not completely unreasonable, is that growth doesn't always result in poverty reduction, or at least the kind of response of poverty to growth varies across countries and across time.
And so there's a sensible question about, well, OK, that's Alright. That's fine. So what should we do then? What does that mean? If you are trying to either invest or attract investment, with poverty reduction being your ultimate goal, what does it imply for you? And the response that we get to that question from civil society is that we have to direct our investments at extreme poverty in a very direct way, by which they mean the business has to employ someone that was living in extreme poverty, or it has to serve them. And I kind of thought that that's not really what the experience of countries that have eradicated poverty show us. So the paper that you were kind enough to mention is called 'When Growth Does and Doesn't Reduce Poverty'. And it was written with a team of academics. And what we kind of show there is... I'm gonna try and hide my face from Lant Pritchett if he's in here 'cause I wanna say this. It's not actually a case of if you can grow, poverty will look after itself.
Many of the countries that were most successful, South Korea, they started with growth first. Five years later, they thought,"Oh, this isn't really working out as well as we wanted it to." And they started doing concerted efforts programs of rural investment, rural roads, rural electrification. The reason we have this correlation between growth and poverty reduction is because governments take concerted efforts to use the proceeds of growth. This is when you do get a good response of poverty reduction to growth, to do things, to take economic activity into places where the poorer people are living. And the story is one of complementarities. One of the things that the DFI could do is that we could get involved in the investments in larger firms that have the scope for economies of scale, big gains in productivity. But what we need to see happen is the government to tax those companies and then to spend the money on health and education. I mean, if you're someone that thinks that development is mainly about good things, education, healthcare, social protection, I've got a little statistic here.
Low-income countries spend on average $5 per person on social spending. Low and middle-income countries spend 90, and upper-middle-income countries spend $360 per person. So you want to see growth for those reasons. And the problem is that if we're telling a story about complementarities and about lots of things having to happen together in the economy, a bit of a problem for us is if we invest in a port, this comes back to some of the things that were said yesterday about the desire to be able to say, "This is what our dollar achieved." If what you're really talking about is something going into a system where the kind of effects are, "We can't tell you when we invest in a port. We can't say there's a thousand people over there that are now this much better off because of what we did." And I think that this is a bit... It's not really a problem for us 'cause we are, after all, still investing in ports, but particular impact investors or people that come from this philosophy where that impact investing is about measurable impact.
I think that is a bit of a challenge when we're thinking about making investments where growth is the motivating thesis.
JONATHAN MAZUMDAR:
Yeah. I think we'll come back to that for sure. James, in addition to support to government's Gatsby, Africa works directly with the private sector to promote transformation and upgrading in high-potential sectors, primarily in East Africa. Could you give us a bit of a sort of overview of Gatsby's approach to that work and maybe highlight two or three of the key sort of learnings that Gatsby has had in trying to catalyze the growth of new high-potential sectors?
JAMES FOSTER:
Great. Thank you. I guess to follow up on Paddy's point, we're a private foundation from the UK. We are a nano funder of nano funding size. We have 20 million pounds a year to spend. We only work in East Africa, and we've evolved our approach enormously over the last 30 years. We started off doing ag research and microfinance and small business services. We did a bit of venture capital work, but now we focus entirely on sectors, industries, subsectors, whatever you wanna determine them. And we try to take a sort of holistic view on the sector, trying to look at how it can grow, how it can develop, where the big opportunities are and what's needed to spur some momentum and kickstart change. So, we focus on sectors for all of the good reasons that we've heard over the last few days that you don't need a perfect business environment in the whole country for a sector to grow and develop. It can grow and develop with a little bit of targeted support, and you can improve the business environment for an individual sector without changing the whole system.
Similarly, you don't need the political settlement to be totally ideal. You can work in a sector where the politics is OK, is acceptable, or it's a new sector, as Jonathan suggested, where you don't have such sort of political economy constraints. I guess, secondly, we pick sectors quite carefully. We're thoughtful about how we get involved and when we get involved. And we haven't done that brilliantly, even despite our efforts at being thoughtful. We tend to try and work in sectors where the government has either asked us because they're really keen and committed to it moving, and then that is often not quite the case when you scratch the surface of the levels of commitment you need. Otherwise, we'd work in sectors where the private sector has got a much stronger role with less government need, and we can see real progress. So choose the sectors carefully, I suppose, was the second thing we do. Thirdly, we focus on transformational change. So we're aiming to create jobs rather than sort of support jobs.
We're aiming to create jobs rather than add $50 of income to a farmer's pocket. So it's very much about trying to look at where investment is gonna come from. Where can the investment come from at scale? How do you get the businesses that can be invested in to be available? So it's working with those right kinds of business that Ken Opalo was talking about yesterday, and trying to identify the right kinds of business is actually really difficult. It's particularly difficult for governments, but it's difficult for us even. You need to really understand the industry deeply, to understand the markets, to understand the potential, to be able to say, "This is a business that's gonna go somewhere, and this one is not." And we've done a lot of work with businesses that are not and wasted money. And then, I guess, lastly, we recognize a lot of complexity. A sector is a system, an interrelated system that is always changing. And so we have to work in a really adaptive way. You work with one business, it changes something somewhere else, and then other businesses come forward.
So we have to work very, very flexibly. We're a private foundation. So that's lucky. We can make decisions quite quickly. So, what does it look like in practice? I guess we've worked recently in the forestry and wood product space across East Africa. BII has actually set up a bit of fund in forestry with a few hundred million dollars to spend on forestry. We're just in East Africa, so in Kenya, Uganda, Rwanda and Tanzania. And we've been working at all levels of the value chain from the production side on the research into new species and which species can grow well and produce good trees right through to prefab housing and low-cost housing development, and how we can get those sort of cross-laminated timber industry moving to provide the stock for housing and so on. But the business problems are enormous. We've got a lot of Chinese investment in East Africa in low-cost veneer production. So, taking a fairly extractive type of industry and selling the low-grade veneers to China. But the government has put some pressure on.
Did a little bit of a export ban for a while and now reduced that and made it a little bit more sort of time-bound and slower. But it is putting pressure on those firms to upgrade. And you're now seeing more vertical integration. We've supported a few firms to upgrade their processing. It's allowing more money to flow back into those people producing trees. So you're getting a now a groundswell of production base increase and so on. Is it fully vertically integrated yet? Is the value chain all there? Are all the bits that you wanna see operating? No. But is it getting there? Yes. And hopefully, it will demonstrate to the government and to other actors that land allocated to forestry can do well in Tanzania particularly. It's got the right growing conditions and so on. So we're really trying to promote a sort of fully integrated industry that can create lots of jobs in downstream processing of furniture and timber construction for housing and so on. At the same time, that's globally competitive and able to compete with what's currently supplying our industry of South African transmission poles and so on.
So that's, I guess, how we work, and we end up working a lot with business. But choosing those right businesses is often tricky.
JONATHAN MAZUMDAR:
Indeed. OK. Actually, it's a nice follow-up. So, Radha, I wanna bring you in here thinking about the types of businesses. And so Building Markets aims to connect, as you said, small businesses in developing countries to export markets. So maybe building on the regional and looking more widely, can you walk us through the case for how market access and exporting actually affects sort of obviously firm growth, but productivity itself and some of the evidence in that area, I think, would be useful. And what types of interventions do you think have been most effective in terms of improving firm outcomes? And try to tell us about how that has also influenced the Building Markets journey and where you guys operate now.
RADHA RAJKOTIA:
Great. Yeah. So we focus both on exports and domestic markets. So, I'll share a little bit on both of those. So, first of all, so I think just giving some context about market access in the SME space. So... Just being candid, you know, getting support in terms of philanthropy and development assistance towards SME growth is an incredibly tough area to sell, right? And it's tough because within philanthropy, I think there's a views that small business owners aren't necessarily super vulnerable, right? They're somewhat capable, they're productive, they're not the poorest of the poor, they're not the most risk at risk of being left behind. Despite the fact that they may have, you know, they may be from particularly the lowest wealth quintiles in their communities. They're hiring people from those same communities. And what you see that pattern you also see in terms of overseas development assistance, you know, there is about 3% of overseas development assistance goes towards SME growth. And when you start looking at what those programs and interventions are focused on, the vast majority, over 50% of that 3% goes towards access to capital and a remaining 15 or 20% on human capital development as well, so training programs.
And so, you're looking, and you can't even get the data on market access. It's not looked at. So, I say, I share this just as a, to give a perspective on how underestimated it is in the kind of international view of what firms need to be able to grow. And that same pattern is also then mirrored in the evidence field as well. So, if you look at, you know, if you look up on J-PAL, IPA, DFID, if you look across these big repositories of impact evaluations to try and understand what rigorous studies have been done around firm growth at the SME level, there's hundreds on, there's hundreds, which is wonderful, but many of them are focused, again, on human capital training, training programs, entrepreneurship, training programs, and then also access to capital. There is a grand total of about 15 that are focused on market access interventions. And you can ask, you know, why is that? Is it because people don't think it's important? But I would suggest that, I think it's actually just 'cause it's really hard to evaluate.
It's really hard to design and carry out studies that connect buyers to suppliers at the levels of scale and sample and power that allow them to be useful in policymaking and sort of meeting the standard of evidence that's required for decision-making. So, we have a bit of a challenge. We have a challenge of not necessarily knowing what the best things to do are. So, we're relying on just a very small set of studies, so kind of snippets, individual studies rather than bodies of evidence or bodies of experience to draw on to know what works. And then equally there's not a lot of funding that's going into that, and there's not a clear sense of where that funding should be directed because it hasn't been clear historically. So, for what building markets does, so we really lead with the hypothesis that that firms are able to meet the challenge of delivering what buyers require if they are given that opportunity. The issues around productivity management, a lot of these things that training programs are geared towards financial management, inventory management, certifications.
These are very important things, but if they're not given the opportunity and the carrot of an opportunity in front of them, then those things are likely to be less effective. And so that's why we lead on the opportunity availability. So, how do we make those opportunities available? One of the things that we really need to focus on is just buyers and engaging buyer interest and stimulating buyer interest. And so, for us, you know, for buyers, you know, buyers who are interested in managing their supply chains and sourcing, they're not really interested in working with SMEs. They're interested in working with larger firms that are tested, that are proximate, that they may have through a referral or a recommendation. So, an SME that is not known to them and potentially far away is a riskier and costlier proposition. So, we take a very data focused approach and really gather a lot of data about the small firms, and then share that with and play sort of a mediation role with buyers to be able to share data about these firms, what their capabilities are, what their past performance is, and where they may be able to meet a buyer's preferences.
Now, in doing this, you know, in terms of what are the kind of core constraints, often, I think, you know, I don't think we've heard very much at all in the last day about just the importance of language, right? So that language is a huge barrier between small firms and potential buyers, and particularly when we're looking at export markets. So, when you're thinking about how a firm might be able to export with a, you know, from Latin America to a firm in the US without language skills, without English speaking skills, then that's a proposition that's not, just not available to them. So, something as simple as just being able to provide translation support. And now with technology that we have available to us, that shouldn't be difficult. But before that, it has been difficult, and it's been done through analog means, through teams of dedicated teams who are willing to spend that time. But now, we have a better opportunity to be able to address just some really basic barriers that are facing small firms.
The other things I would say are in terms of what really helps is also just buyer preferences in terms of, for small firms to understand what goes into, how do you, the other thing that they're not good at demonstrating is just speaking the language of a buyer in terms of supply chain categories and product descriptions. So, again, something very simple. When they have in their textile company, they may not have the right classification codes to be able to just describe and make that basic match. So, we're not talking about necessarily changing the way they're producing their textiles, how they are manufacturing, shipping, any of those things. What we're talking about is can they even just describe it effectively in a way that's going to hook, hook, provide a hook to a potential buyer. And the last thing I would say is just in terms of once we make that connection, you know, one of the things that we really need to see is, and we can talk more about this, is there is a need for working capital.
So again, at that small firm level, we've talked a lot about investment. We get called by a lot of impact investors who are interested in using our pipeline of firms to be able to identify investment opportunities, which is great. But that really would speak to about 2 to 3% of our business network. Whereas actually there's probably about 80% who have the potential to grow with the availability of working capital and would be able to then fill and become part of that pipeline or pool for potential future investment. And so, I'd be happy to talk a little bit more about that later. But I do wanna say that, you know, from our experience, what we have seen is that firms can deliver, small firms can deliver, and it doesn't need and it won't be every firm, right? So, we expect that from our network, it will be about 10, 12% who will actually be able to deliver, and the rest will be sort of working through that funnel of building capacity, building their past performance so that then they would be ready for those supply chain interactions.
And over the time that we've been working in countries in fragile and conflict affected countries through to low-income and middle-income countries, we have helped facilitate $1.4 billion in contract value for small firms. And so, that does suggest that there is capacity there and there's a great role for philanthropy to play in unlocking that for small firms.
JONATHAN MAZUMDAR:
Thank you. Brendan.
BRENDAN MULLEN:
Jonathan.
JONATHAN MAZUMDAR:
It's a nice link, kind of this capital and knowledge, to what I was wanting to talk to you about. And so, you've written about this arsenal of investor operators for Africa that complements financial capital to unlock the growth of high-potential firms. So, as an investor from that perspective in Southern Africa tell us more about that idea, what's kind of the rationale behind it, and how does the Secha Capital approach of address the gap that SMEs often face between sort of the know-how and management practices required to fit into supply chains reach customers at scale?
BRENDAN MULLEN:
Yeah, I appreciate the question and it's nice to follow these esteemed colleagues. I think even following that, there's so much complexity of what we're trying to solve here. So, we started with first principles. How do we get beyond that complexity? Well, it's really, let's get, as close to the coalface as you can and give these businesses the best opportunities to grow. So, that's the operator investor model. Succinctly, it's human capital arbitrage. We change the flows of capital from the best and the brightest on the continent. We find great companies to invest in. We give them capital, financial capital. And then we second these operator investors in there. So, we steal from McKinsey and Goldman, and we put them into small businesses that sell wigs, make battery storage, work on farms and it's been successful. It creates a lot of jobs and creates financial return.
But maybe backing up, why this intervention? You can tell by my accent, I am American, my co-founders are South African. So, I've done some VC and PE in the US and then I went over to South Africa with Bain & Company and worked for some of the most esteemed VC and PE firms on the continent. And I was surprised that different market, different opportunities, different challenges, running the same playbook. Actually, I learned a term yesterday. I'm gonna use now, but it was isomorphic mimicry. Like, why are we copying Silicon Valley or like LBOs in this totally different market that's grown differently? I mean all the complexities and differences in opportunities that we've talked about. So, we start with first principles and in impact language, it is missing middle and management gap in finance language, depending on who I'm speak to. It's financial and human capital arbitrage. So, we try to be a little bit differentiated around where we invest. And I can speak about that later, but I don't wanna go too long, but basically we're not trying to do moonshots and get unicorns, capital flows to the extremes. So, it's that boring VC, micro PE.
Yeah, companies that I'll try a new one on, on y'all, companies that are in a rut or sectors that are in a rut and that companies that you can reinvigorate, upgrade and then transform. But I digress. So, the operator, investor model was the biggest key. These are great companies, but it is very difficult to run a business, period. It's difficult to run a business in these markets, and it's way more difficult now than 50 years ago, right? Like the average entrepreneur didn't need to worry about like installing Google Pixel and doing e-commerce attribution or the complexity of exporting, right? So, we said, these are great entrepreneurs, let's give them the right to win, the best opportunity to grow. And we created such a capital $35 million fund. So, not big checks, but chunky enough. And then when we bring that check-in, we second somebody else, one of those McKinsey, Bain, Goldman grads do they have the domain expertise? Are they ag experts or renewable energy? Generally not. But they are insecure type A's, and there's a lot of them on the continent, right?
It's the last, I mean, the last like 80% of our last ten hires, otherwise, would've taken a job in London, in New York, and now they stay on the continent. So, it reduces the brain drain. And it creates an excellent story for the diaspora. You can come back, you can have an amazing job. It's a de-risked way of doing entrepreneurship, and it's a lot of fun. I feel like I designed my dream job from when I was in my 20s and now they get to live it while I get to speak on panels. (LAUGHTER)
JONATHAN MAZUMDAR:
Brilliant. OK, let's come back around. And then there's a couple of things that now have occurred to me that this link between large firms, small firms, the type of industry and sort of maybe even technology will come to you. But back to Paddy. Let's get into a little more details on BII, you know, building on sort of the conceptual basis and the argument you gave us, just share with us some specific examples of the different investment approaches or projects or instruments that BII is engaged with that sort of speak to this mission of promoting growth widely.
PADDY CARTER:
OK. Thanks. So, I'm gonna talk about three things. One is what we call internally economic enablers, which are investments where we expect there to be spillovers that result in many other firms making investments and improving their productivity. I'm gonna talk about catalyzing markets and awfully overused word, catalyzing, but it's what most of us DFIs, have in our thinking some sort of market creation thesis around some investments. And then I'm gonna talk about qualitative aspects of finance. So, not just supplying debt, credit constraints, but getting into the quality, the characteristics of the finance. But before I start talking, I think, it's really quite a relief to be an event like this and not be having to talk about blended finance and mobilizing. (LAUGHTER) But there is like obviously a lot of interest in mobilizing private finance. Everything I'm about to talk about works through firms investing, not with our money. The model is that we're gonna end up with investment taking place, with some exceptions.
Nothing that I'm about to talk about is counted in mobilization statistics. So, the whole kind of mobilizing private capital agenda is kind of missing what I'm about to talk about. So, this first thing economic enablers, I mean, there are different ways of approaching this. What I'm talking about here is quite close in spirit to, I think, growth diagnostics that were mentioned yesterday. I want to, 'cause he's a friend, I want to promote his stuff. There's a terrific paper coming out by Tristan Reed looking at how to I think pick winners is the title. And it's all about trying to identify firms which are sort of technologically proximate to what you already do, but also have the potential for export markets and producing its scale. At BII, we've been particularly inspired by papers, by evidence. Charles Jones has a wonderful paper called Weak Links in Production Networks. And the idea here, you think about the economy as a production network, and then you have firms sell stuff to each other, they all use.
And if you have some kind of weak links in there, intermediate goods inputs to other inputs to production that are not available, or they're low quality, or they're too expensive, they can really hobble the entire production network. And if you can fix them, you have a big spillovers. And there's actually quite a lot of work now looking at the production networks and where to invest to get these positive spillovers. So, we've operationalized that by more or less coming up with a list of types of business, which we think we found good empirical evidence for these spillovers. And all we ask of our investment professionals is that they go out and they try and prioritize investments in this type of business with one condition. We want them to also be able to tell us a convincing story that this thing actually is a constraint. It actually is a problem in the economy that they're investing in. So, these are things like reliable and affordable power cement logistics ports. Yeah, it's not rocket science, but it's a little bit different from how DFI have previously thought because DFI have historically been a lot about back, what I'd call backward effects.
Like what jobs are created in the production and supply chain. What I'm talking about here is forward effects. So, we're trying to think about what's gonna happen as a result of the goods and services that the firms are producing. So, that's one way that we use to prioritize investments that we think are gonna have a big effect on growth. The other one is this idea of catalyzing markets. So, most of us DFIs, we have this as part of our thinking. It's a little bit under the radar really. I don't think it gets as much attention as other ways of mobilizing capital. Now, some of the bigger regional development banks, multilateral development banks, they're able to wrap around policy advice, regulatory reforms, the kind of work that you do, you know, really trying to understand think about like various things that need to happen. BII, we are more like, we just give money to firms that want money, and we don't have like, some of the policy sides that we can do. But, and what we're thinking about here is we're thinking about forward effects spillovers, but it's not through the tangible outputs, it's through intangible things like knowledge creation and behavioral change.
And that often means innovation. And it can be innovation at the level of the business, or it can be innovation at the level of the vehicle. But what I mean by the vehicle is we might, for instance, support the first venture capital fund in Africa that is solely focused on green technology. And what we're trying to do there is show that it's possible to have a profitable venture capital fund that is focused on green technology. And we're hoping that other people will copy it. I think a good example of what we do here is the EV market in India. I mean, it's really fascinating. Everybody else is talking about chargers. In India, it's battery swapping and three wheelers. And we have a, like a set of investments where we are in the three wheeler EV manufacturers. We're, we're backing the battery swapping networks. We're backing companies that kind of collect data about EVs to allow people who manage fleets to understand the value that they've still got left in their EVs. And then we've got people that finance EVs using that data.
So, we're try, I don't wanna oversell it. I mean, if it is system thinking, it's system thinking of a fairly simplistic in a way. But we do try and when we can like think about what it's gonna take for a market to take off and then try and find investments that work like that. And then the last thing I wanna talk about, this idea of the qualitative nature of finance. So, I have, and I think DFIs have a deeply held belief that the supply of patient and risk bearing capital to larger firms, medium-sized firms, large firms that have the potential for expansion. If you wanna talk about what we can do to accelerate growth, this is really where the story is. Look, we don't have. I mean, I feel like I might get hit by lightning in this building if I say this, like we don't have rigorous empirical evidence about that. There is no exogenous variation that an economist can use to identify the impact of a 10 million pound equity investment. And so, we are motivating what we do here by our understanding of how business works and what markets need.
I'm afraid I'm gonna promote a second paper that I've written. I have to justify my airfare. I'm sorry, I've gotta... We've recently published a paper called investing for impact in African Private Equity Funds. And this is an example of something that we think is very important for growth. But most people in development, given the horrors, I mean, private equity is a lot that's not development. Most people think of private equity as leveraged buyouts and operating hospitals and making them worse. Whereas what the kind of private equity funds that we are talking about, we are talking about growth capital, we're talking about money being injected into businesses, not money being used to buy them off the previous owners and load them with debt. And it's not just about equity. There's lots of very interesting non-bank lenders. They're not necessarily, they can be funds, they can be private credit funds, but they can be other structures as well. And what they're doing is they're putting more flexible, more patient money, longer-term debt with the ability to sort of like have payment holidays and maybe have the repayments vary with the performance of the business, much more suitable for growth.
We think they're very important. But the economics of these funds, it's really challenging. It's not easy to cover your overheads and your transaction costs from a small balance sheet, the returns on a small balance sheet. And also, DFI don't like dealing with them because I mean, we would love to deal with the 250 million pound fund that can take a 50 million ticket from us, but we're not so interested in dealing with little funds that each takes like 2 million or 3 million of us at a time. (LAUGHTER) But it is a reality. And I think personally that there's this great scope for innovation and maybe a bit riskier. I think you could even make a case for temporary subsidies, like something to do to help these types of very exciting financing businesses kind of get off the ground and establish themselves and get going to the point where they no longer need subsidies. And what you talked about, I didn't know about this operator investor model, but I think that one of the things that you could do is that you could try and take some costs off these.
Someone told me yesterday about fractional CFOs, you know, you hire a, you know, we could maybe do things where you kind of, you cover a bit of their costs and make the economics of them, of running these little lenders a bit more viable. I'll stop there. Thanks.
JONATHAN MAZUMDAR:
Brendan, actually, go out of order slightly, but do you wanna add any of those things?
BRENDAN MULLEN:
All great things maybe, yeah, two things that jumped out at me. So, the fractional CFO, we do use that, but I also want to be clear, like with our operator investor model, we believe you need to be there like full-time. This is a full-time gig. You hear like, oh no, when I was consulting for KPMG, I would work two, you know, six hours a month, I would help out this small business in Africa somewhere. I'm like, that's not helpful. No, that is not helpful. If you're like an experienced person and offer advice, you know, maybe, but like people need boots on the ground and help and owning an initiative and knowing when it's gonna get done, and you need to be in the office to hear what else is going on and what's to prioritize. So that, and yeah, we have tried to tweak fund economics by getting the operating investor model subsidized because obviously you want a big team, but then you need a big fund. If you have big fund, you have to write big checks. And that's not helping the small growing businesses.
And also, I don't think that's where the returns are, and that's not where the job creation is, in our experience, at least in South Africa and southern Africa, which is different. The second thing that you mentioned was like a green technology fund, which I think is great.
Any funds are good, but there's a unsexiness opportunity and we are so pure sometimes in how we use development capital or investment capital in Africa when there's so many services businesses, you know, like boring businesses to use the term that could use a little bit more capital, could consolidate, could grow, could create an economic multiplier so that then, you know, that founder's daughter, she starts that green tech company maybe in ten years, but then she'll have the capital behind it. There is not enough depth or breadth of capital to have funds or flows of capital be that specific, because then it's not agile. And when it's not agile, there's not going to be anybody that's going to buy them out sometimes. And when there's not enough depth, there's not going to be a follow on. You know, we can invest equity, but who's going to bring in the (INAUDIBLE)? You know, and we go to somebody like, well, sorry, our minimum check size for (INAUDIBLE) is $50 million. Or, you know, you're big enough, but we only invest in urban set companies, not rural.
Like we're getting a little too precious with the flows of capital. And I understand capital has constraints, but I fundamentally believe that's actually what's holding us back, is that it's the, when you, you know, have, and I also understand from economies of scale, you need to drop the $50 million pound check as opposed to the five. But if we can get a little bit more diffuse with that flow of capital, it'll find, you know, the right area. It'll be much more efficient. Easier said than done, but that's kind of my response on that. And that's what we're trying to do with our portfolio, which I guess to actually address the question.
PADDY CARTER:
If it's OK if I just do a very, very, very quick response.
JAMES FOSTER:
Can I just add it here, here on what he just said before you jump.
PADDY CARTER:
I think if we are, I kind of fund strategy, we definitely see a need for generous funds. And there's a general lack of, you know, like these lovely little super impactful VC things. They're only like one of a set of, we agree with you.
We see a need for everything across the board.
JAMES FOSTER:
Can I just ask you a question as well? Yeah. Which is the level at which you're able to take that lens of broader market impact and the incentive structures of general finance institutions is that as a fund manager in one of those institutions, you don't want to have a bad deal and your focus is on the profitability of the deal. These sort of additional, you've presented a very good case, by the way, but the, like the reality of the decision making of the fund manager, how realistic is it that they are looking at the breadth of potential spillovers from an investment or the real market drivers of the investment when in the reality of their decision making, what percentage would you say is actually this bigger issues?
PADDY CARTER:
If I put myself in the position of a GP or fund manager, I'm going to say close to zero. Yeah. I mean, and I think that the people that we're invested in, you know, what you want to do is you want to find investments where their profit incentives and your impact thesis are aligned.
When it comes to the incentives within DFIs, I mean, we have some staff renumeration based on our impact score and our impact score rewards people for finding investments that have these characteristics. But I mean, I'm sure you're right. Nobody wants to be have their name associated with a failed investment. And you know, I think that in some areas like agriculture, you know, we have examples where the business that the DFI invested in failed as an investment as far as the DFI is concerned. But the, it went on to kind of anchor a local, like, and I'm, you know, I'm sure DFIs have ambiguous feelings about it when that happens.
JAMES FOSTER:
No. I'm sure. Absolutely. And the old CDC used to do real sector transformation work, building sort of five or six companies in the same sector to drive growth. And that's, I guess, where we're trying to come in.
JONATHAN MAZUMDAR:
Good. That's actually what I wanted to ask you a little bit about, but, and it's kind of emerged from a few different points of, you know, some firms are different and so they may be due to the link in the network.
It may be kind of, because they're able to deliver on sort of the demands of buyers. But you guys at Gatsby have done research on sort of the emergence of new sectors, right, in various countries and cases, floriculture in Kenya, salmon in Chile. We've talked about sort of Bangladesh and garments as a very famous story. So, oftentimes in those cases there's this sort of pioneer firm, right? Some key firm, and maybe it's actually then a cluster that plays some key role in igniting more widespread growth. And you know, they have to demonstrate actually in that particular place, this activity is profitable and there's sort of substantial risk associated with that. So, maybe what are some of the key takeaways on how to actually forge those pioneer firms? What can we do as external actors?
JAMES FOSTER:
Well, it's not easy (LAUGH). I think. I mean, if you look at the case we're hearing yesterday on Ethiopia and the industrial parks there, you look at the role PVH played in anchoring that ability of the government to borrow 250 million and invest in the park.
It was crucial for that whole enterprise to take off. And you've now got 60,000 jobs in Hawassa Park and a big uptick in Ethiopia's exports. So, you know, these anchor firms can play a very, very, very important role. I guess, it also talks to the point that when you're looking in a new sector or looking at a sector that exists, often the firms that you want to work with are not actually there. You know, you can work with the existing industry, but the existing industry has stayed the size and scale it is. Because those firms are not growing for various reasons, and maybe because they don't have the right management capabilities, they might not have the right financial access, but often they might not have the right incentives to grow for various reasons. And so, actually, a lot of the work we've tried to do in different sectors has been to create new business models or bring in new businesses from the start that can demonstrate sort of a new way of doing things, whether that's the tea industry in Rwanda, where we essentially created a new business model by buying two tea factories together with the farmers, trying to replicate a sort of Kenya Tea Development Agency model, but in Rwanda, in Tanzania, well, in Kenya, in the region, we've introduced, we brought a management team in to set up a new fish farm in Kenya called Victory Farms.
And we co-invested, well, we co-sponsored their feasibility study because we knew there was no fish farm in the region doing data led management, producing fish efficiently, effectively and cheaply that could compete with Chinese imports. And so, this team has now set up. They've got a big farm operating. We had to co-fund their initial working capital because local banks didn't understand the business model. No other finance institution was willing to step in. Now, you've had a few others coming on. They've raised another ten, 15, 20 million. And they're the largest farm in East Africa. Three other large farms have come in and copied their business model. And now we're trying very hard to look at how do you get this sort of mid-tier of farms to adopt some of those better practices? But what's great about that is that you've seen the growth of these sort of production industries, and now you're allowing the investment in feed manufacturing, which is now something we've also helped to catalyze.
And you're starting to see that sort of vertical value chain taking place. At the same time now is the point at which we're going to the government and saying, “Look, this is happening, there's some momentum here. You've got to protect it because you need zoning in the lake, you need environmental protection, you need disease and fish health management and so on.” And that's all the stuff that you'd like to start with that, you'd like to have that in place before you build an industry, but actually it's only going to really be feasible once you've got enough scale of an industry for it to be valuable to protect it. So, the pioneering firms piece, I guess, for us it's about identifying a market opportunity where there is scope for a large firm to come in and play an important role. It's then about identifying the right type of entity if they exist, great, you can work with firms that are there, but otherwise you have to bring some in at times. And that's often tricky. And that leads to sort of some political problems.
Certainly those firms, if they're internationally funded and financed and run can cause social problems locally. And managing all of that is very, very important and takes some effort.
JONATHAN MAZUMDAR:
Radha, following that, I want to return to you, and actually two questions. I think one is sort of following on this of how, you know, maybe an anchor firm or a large firm can productively engage with many smaller firms and what that interaction might look like and how that sort of could be mutually beneficial. So, that's one. And then the other is sort of coming back to what you had referenced earlier around, you know, the possibilities for, you know, in addition to market access or in complement to that, thinking about different types of finance and different tools that could be potentially related to, again, these contracts or engagements with larger firms. So, kind of this dynamic or interaction, I'd love to kind of hear your perspective on.
RADHA RAJKOTIA:
Yeah. Great. So, on the firm's piece, I think I'll give you an example. So, we work in Colombia with, specifically there, we're focused on firms that are, that engage people who have been affected by displacement. So, a lot of migrants, a lot of internally displaced people. And we work across sectors, but we have a concentration in food and beverage and in hospitality related industries. And so, we've done quite a lot of work with hotel and supermarket chains in Colombia and with the associations, the biggest associations there around that. Now, one thing to know is that I think, you know, Colombia is a country where they've got incredibly complex public procurement systems that have been making strong efforts to be able to make it more transparent, more accessible, you know, public (INAUDIBLE), you know, been in place for a few years in terms of publicly publishing procurement opportunities. There is no parallel to that in the private sector. So, in terms of supply chain opportunities and purchase opportunities in the private sector, that is all still done very much from through word of mouth and existing networks.
So, the first thing I think that's been really key to do, and we do this, we can't do this work alone, so we do this with the big trade associations of hotels, supermarkets, the business guilds with the chambers of commerce, with the business promotion agencies as well. And I should stress that much of this work is also, it's really important to focus on both the municipal and regional level. And I think this is quite different in some ways that when we're talking about small firms, we really do need to get down to that level. We're talking at mayors offices, we're talking at, you know, municipal offices, very local chambers of commerce. And so, you know, and again, this speaks to what I was saying originally about just the challenge of working across a very sort of fragmented and large volume of small businesses. But those opportunities in terms of consolidation and coordination for information sharing are really important. So, we do, so we really take, you know, we really take as incredibly, we take as great, with great importance the role of our allies and and partners and kind of coalition members when we're looking at a specific sector or opportunity in those hotels.
So, I'll take the kind of hotel hospitality area, that is, you know, that's an area, for instance, where the first thing to be able to do is really just provide what the upside is in terms of variation innovation that small firms can provide. And so, one thing that's been really, what really interesting and has worked really well is a lot of the hotels that we have in the buy, on the buyer side that we've worked with have been really interested in, for instance, how do you localize your minibar, right? So, (LAUGH) when you're thinking at the level of, you know, they don't want to have Coca-Cola and M&Ms in their minibar anymore, but they want to be able to replace that with local Colombian foods, drinks, traditional sweets, that's a great entry point for local firms to be able to play a role. And it's bringing them into their network in a way that they hadn't done before. Now, that's the sort of purchase that I think that for a lot of hotels, they don't really want to be spending a lot of time sourcing those kinds of firms.
And so, again, that's when being able to provide data on vetted firms that we've already collected a lot of data on. We can give them information about their past performance. We can give them information that just takes some of that initial sourcing headache away for them. It makes it a much more compelling opportunity. Now, I've given you a very micro example, but you can multiply that across furniture, you know, the actual construction materials to build hotels, what's in the gift shop, what goes to guests on their arrival, all of those things. So, and then also the support services that are provided. So, you can really think about in the experience that these buyers may have, where are the various entry points? And then thankfully, we have firms who can provide those in many cases. So, I do think a lot of that initial engagement for the buyers is really just that initial vetting. That's the point at which they want the most sort of mediation. And then beyond that, you know, that eases with time.
In terms of the question around the financing, so here, I think, there are, we see a lot of appetite from buyers that we're working with to actually put money into working capital funds. They're very happy to engage in supply chain financing for this. The challenge that we have, and this varies market to market, is just the cost of capital and the lack of flexibility on it in many cases. And we're talking about populations that don't Necessarily have many other means or are perceived to be too risky from Traditional financial institutions. And so, there we do have to look for alternatives. So, whether that's through corporate buyers or by working through private funds as well. So, yeah, so that's been sort of a newer area that we've been focusing on in the last couple of years.
JONATHAN MAZUMDAR:
One last question, then we can, yeah, we can open it up to the audience in a second. Radha, you had mentioned, you know, this point on the evidence around market access, potentially, you know, that being limited, at least, relative to some of the other areas that have been studied.
Paddy, you also kind of brought up this point that at some scale and some size of investing that that same type of evidence may be hard to come by. What can we do about that? What do you encourage sort of more exploration with, and how do we sort of make that case also to potential funders who have that expectation of, you know, certain type or framing of data and evidence? I don’t, yeah, whichever.
RADHA RAJKOTIA:
I mean, I'm, you know, I think there's really simple things. I think that, first of all, I think setting up, I spent a number of years working at innovations for Poverty Action, and we found that one of the easiest way to draw research interest into under-researched areas was to set up a research fund is to just say, "We will give you money if you can come up with good designs and find implementers." We've done this, you know, we've done this a number of times. So, I do think it sounds obvious, but just making funds available that this is prioritizing and signaling that market access is a priority area of interest is a really simple way to draw both researchers and implementers, whether those are government, civil society or private sector into the space.
I also think a second thing that can be done is looking where there have been been compelling studies with promising results, replicate them, let's like replicate across markets. Because at the moment, as I said, we've been looking, you know, we're drawing on individual studies to be able to draw insights which is dangerous. So, for us to be able to replicate across geographies and really be able to start learning from bodies of evidence would be very valuable.
PADDY CARTER:
I think there is evidence, but it's a different kind of evidence. My real job, everybody, is I sit in London and I read economics PDFs. (LAUGH) And I have folders and folders of papers, but what they're not is they're not an estimated treatment effect of an intervention. They are, we've looked across countries and over time and we've got a model and we've calibrated it. And this is how important we think ports are. This is a paper about how important it is to make cement cheaper. But these will be maybe theory calibrated, you know, it's just a different type of evidence and we have to, we just have to get people comfortable with looking at that kind of evidence rather than the, here's my project, I've proven my project did this, the type of evidence.
And it's really hard because everybody wants us to have that type of evidence, but I think we just have to fight the fight.
RADHA RAJKOTIA:
So, I would say I'll push back on that only to say that at the firm level, that's why we've ended up with so much resource and policy attention paid to training for firms. And I'm not sure that that had, you know, because that is where the most evidence has been and that may be misplaced.
PADDY CARTER:
Yeah. I mean, I'd agree with you there. I think you're talking the same thing, but on the... (INAUDIBLE).
JAMES FOSTER:
On your comment, I agree entirely. I think one of the things that we see with development funding is that it looks for really detailed evidence of the success of a specific intervention. And I guess, at a, for us, at a sector level, we're able to take a much bigger lens to this and to say, "Look, is the sector changing? Have the things that you said you were trying to do to change and to change outcome level changes? Have they happened? And then are you able to, as a result of that, assume that there's been some contribution from you to the wider change in the sector?" That for us is good enough, but there are very few funders out there at the moment who are accepting of that level of, sort of proof, if you like, of attributable change, you know, and I think we have to, in the sort of complex systems where you're trying to work in with business and the business community and the whole sort of policy sphere as well, you've got to accept slightly more contribution analysis, contribution sort of changes rather than this sort of, have we proved the nth degree of attribution? Sorry.
JONATHAN MAZUMDAR:
Yeah. Yeah. Great. I think let's open up to questions. So, yeah, just let's, we have the microphones. Yeah. Start by saying your name, and then let's keep it brief. And then please don't forget, questions should end with a question mark. So, (LAUGH) the gentleman over here in the jacket, Devin, and we'll go with Kartik and come back.
NEIL GREGORY:
Hi. Great panel discussion. Neil Gregory from ODI. I'm very glad to see the focus on the importance of large formal firms, a refreshing change from so many discussions. But when you look at the size distribution of firms, particularly in low income countries, what you find is there isn't a missing middle, there's a missing top. And I did research, led research when I was with IFC, which demonstrated this for a number of countries. So, the question to the panel is, given the importance of large formal firms, and there aren't enough of them in many of these markets that you're working in, where are these new firms going to come from? And I won't allow you to answer from SMEs because we also debunked that myth.
Most small firms do not grow to become large, most large firms start large. So, how are we going to solve for the lack of large firms that most of these markets?
DEVIN CHESNEY:
I actually have a very complementary question to that one. So, my name is Devin Chesney. I'm with the Aspen Network of Development Entrepreneurs, part of the Aspen Institute. And one of, I think, using the term firms here, actually, it masks a reality of this work that I'm curious for people's thoughts about. So, we talk about entrepreneurs. The difference between an entrepreneur as a firm is that entrepreneurs try many times, usually before they're successful. And we also use a term called small and growing businesses, which sort of pulls out of SMEs, the ones who actually have a growth oriented mindset and are looking to address a market opportunity. Similar to the distinction about different, like livelihoods entrepreneurs or necessity based entrepreneurs are very different category and we try to exclude them. So, everything I'm talking about is about these growth oriented businesses.
But we know, for example, that the average successful entrepreneur who reaches any kind of scale is on their third business, right? They failed twice and the third time they figured it out. They are also, on average, 40 years old. So, they've had some industry experience somewhere along the way. And so, I wonder, how you think about, like, one of the constraints to finding good growth-oriented firms that become large is the number of entrepreneurs who set out on that journey at all with a growth oriented mindset, right? Because most evidence says you need about ten small firms to get one medium firm, you need ten medium firms to get one large firm. And so, you need, you know, 100 to start to get one. And the system doesn't often have the resources in it to support people in that journey as an entrepreneur to try and to fail. Because, I mean, all of the panelists are doing amazing work, but you all talked about trying to find winners rather than the ones who will fail, right? You're trying to avoid working with the ones who will fail.
Somebody has to give people a chance to fail so that they will learn and become a successful entrepreneur. We tend to think that should be development agencies. They should be paying for the public goods that allow people the opportunity to fail and learn so that you will get a stronger pipeline. But I'd be very interested to hear about the panelists thoughts there.
JONATHAN MAZUMDAR:
We're doing. Yeah. Richard.
RICHARD NIERLAND:
Hi. I'm Richard Nierland. I previously settled securities. Just quit my job considering maybe doing impact investing. So as a part of that, my question is, like, as a quant trader, where are, like, the resources that you're saying for public goods that I could look for? What places have been successful? Where's the data? Is there, like, a public good that is, oh, all the successful places that have gone along that didn't and what are, when you said it's very high cost of capital, that sounds like to me as an investor, oh, there's a lot of opportunity here. Why isn't there a lot of opportunity if they have a high cost of capital?
JONATHAN MAZUMDAR:
That's going to be up to you guys.
PADDY CARTER:
The high cost of capital thing, I mean, I was at an event recently with Nigerian entrepreneurs saying I'm getting charged 45% interest. I'm not gonna borrow at 45%. The reasons why the interest rate is 45 percent in Nigeria are not, I think, because there's... I don't think it's a reflection of, you know...
RICHARD NIERLAND:
Like a real effect, like an effect of capital after...
PADDY CARTER:
Oh, OK.
RICHARD NIERLAND:
After the fall rate, after inflation, like, I understand that you're in, like, a local US.
PADDY CARTER:
OK. I misunderstood. Sorry.
RICHARD NIERLAND:
Yeah.
PADDY CARTER:
Yeah, I'm a bit stumped on how to answer your question in that case, I'm afraid. I don't really have a good answer to you. And I think on the large firms, I mean, I've tried to answer a little bit of that already. I think another thing maybe is also that DFI is we have to be additional. And you know, maybe these businesses that we're setting up in Morocco to manufacture cars don't really need a DFI to help finance them. And then sometimes when we do work with very big firms, it's very hard for us to communicate why we were needed. And the example I have in mind is that we invested equity with Vodafone and Sumito and oh, I can't remember, Safaricom, of course, to bid for the first license in Ethiopia. And you know, that resulted in not this particular investment, but the whole liberalization process resulted in data prices, you know, tumbling in that country. And if you would think of an investment that has a positive impact in terms of, like, the change in people's incomes, it's fantastic.
But most people reacted to that, saying, what the hell are you doing? I mean, Vodafone can get all the money they need, surely, and we have to try and explain to people that even Vodafone don't want to go into Ethiopia unless they've got someone sharing some risk. And it was not just about the risk capital. It was also about the UK government and how we could help out there. So I think we sometimes face challenges dealing with the very largest firms because it's kind of hard to confidently find our place with them, if you see what I mean.
JAMES FOSTER:
I think we can agree very much. It's a great example. Where we've seen trying to get large firms in, that $250 million investment I was talking about, you know, it did need a bit of government support to land it. And that wasn't forthcoming because they had the zone, they had the zone demarcated, they had the approval that this is what it was gonna be for. And yet they didn't want that one firm to control the whole zone. And so it was so frustrating where we had brought them in, we'd got all the investment promotion work done, and the business case and the market opportunity was all there. But it was too big. So that was deeply frustrating. I guess on the, so I suppose the point is you can get investment promotion going, but it needs to be really aimed at large firms from the start. And the pioneering firm we talked about in aquaculture, we've now brought them the same for fish feed, and that's great. It's changed the dynamics of that whole industry with the other large firms doing feed in the region.
Allowing firms to fail alongside this large firm investment in aquaculture, we did work with 20 medium-sized firms in the aquaculture space, of whom probably five will be profitable long term and survive, and 15 won't. We probably spent too long with the ones that weren't gonna make it. We wasted time and money and effort with them. But we wouldn't have known that they weren't gonna make it up front. Almost impossible to do a sort of ex ante decision over which ones are gonna make it and which ones are not. You've got to work with them to see how quickly people listen and engage and try and take on their own version of what's good practice and so on. So I think we have to be, as you said, we have to make that effort, but probably we wouldn't do five years of support. Actually, it was only two, but even then, two was too long. And actually what we're doing now is we're now looking for entrepreneurs that have got some experience in agribusiness, got some experience in sort of business management in different fields that we can bring into fish farming in the region in East Africa.
Because we think that with an agribusiness background, you'll actually already be ready to go and think bigger and have that data-led management practice sort of sign up pretty quickly. So looking to get the right entrepreneurs in from the start, I suppose.
BRENDAN MULLEN:
Yeah, I think the Victory Farm, I don't know as well as you, but the Victory Farm's example is fantastic. We should make that more well-known. Maybe you'll all work on that. I mean, I know it from afar. It's also messy, right? It took a while. It took a lot of capex. It took way more investment than was the plan, but it's a huge success story. And I think what you can learn from that is that was built for the local context. So is it modular? Is it replicable? I think so, but it also takes hard yards. I think it goes to both the questions about the large firms in small-income countries. I think my perspective is mostly middle-income countries. So can you create a model that you could stand up in those two different country examples, but would be thinking about the local context? And that's what we found to a degree with our portfolio. I'll give two quick examples, speaking to the size of firms and the human capital component, the entrepreneurship. So we invested in a battery storage company, because there weren't a lot of local battery storage manufacturers in South Africa.
And now we have a lot of large multinationals sniffing around trying to buy us. And they're gonna be entering South Africa via our battery storage company, because they need that step in the value chain. We had a local advantage of manufacturing and software built for South Africa. So it was helpful for them. We are going into other markets, but it's very hard. We're trying to crack Zambia right now. We can talk later. So that was able to attract a large firm. I don't know if it's the full answer, but yeah, different market, right? We keep using Malawi as the example. It would be different in Malawi. We would go about it a different way. Maybe franchising, it would be a different model. But yeah, keeping it modular and replicable. And then speaking to the entrepreneurship, I mean, there's so much thought there. I'll just kind of pitch our book, pitch my book with Secha, is that this operating investor model is a very de-risked way of doing entrepreneurship. And we kind of borrow from the search fund asset class that I know you're well aware of, and kind of larger private equity value add teams.
But it's hard to tell, so Malefe, he's a McKinsey grad, graduated with HBS, hard to tell his parents that he's gonna start a business despite this, you know, they're like, stay at McKinsey. You know, like, stay at this, but now working with us, he has the kind of the pedigree of a Secha capital, you know, a fund, and he's going to go buy a business, a medium-sized business, and make it large. And it is that elite bargain that we were discussing yesterday that, you know, these operator investors, they go on to start businesses. They go on to join large businesses. They've now seen what good looks like. They share their capabilities with those small growing businesses, and then they go on to do it again and again. We hire them at, you know, 25, 30, so by the time they're 40, maybe that's when they start their business. But, you know, I think a de-risked entry into entrepreneurship is keeping. We can handle losers. Secha, we're going to make 15 investments in this one fund alone. We can have a few losers, as you say.
But, you know, Malefe, he's going to get one shot, really, at least, you know, his perspective at 30 years old. We've got to help get it right the first time.
JAMES FOSTER:
Maybe one pitch for additional research, which is that one of the big foundational sort of thinkings, I suppose, that we have in terms of where growth will come from as well is existing employees of those large firms. And if you look at the Bangladesh garment story and so on, you've heard it ad infinitum that these are the ways that people come out of these large firms with the experience and able to then apply that in their own context. I guess it'd be really nice to see skills-building programs think about that, you know, and actually assess that. And I don't know, I haven't seen much on it, but is that something that we could then use to tell some of those stories that we're investing in this firm, but the spillover effect actually is going to be through its employees leaving? And are there schemes to encourage that? You know, like, can you actually do, like some of the black economic empowerment schemes in South Africa where you drive an encouragement of certain types of suppliers?
I don't know, there's something in that maybe that could be a way to go. But I mean, we're certainly hopeful that that's what's coming from the textile and garment industry. But, you know, we haven't obviously seen it yet.
JONATHAN MAZUMDAR:
Radha, anything you want to add on, I was thinking of your sort of the funnel you have.
RADHA RAJKOTIA:
Yeah, I was like, oh, I feel like a funnel is fairly self-explanatory. But, you know, the funnel does mean that, you know, we don't expect, you know, this is a journey. We're not expecting small firms to all be ready for their first big procurement opportunity or supply chain opportunity. There is, you know, there's a subset, about 10% plus, that would make that. But even getting to that point, you know, we did an analysis of firm survival for about 5,000 of the firms that we work with in the Middle East. And there, one of the core things, so core things that promoted survival, one, multilingualism. That was a huge driver of firm survival. And a second thing was diverse market access routes, right? So are they using domestic, are they using digital, are they exporting? And if the more avenues they used, the more likely they were to survive. And so when we're thinking about this journey, we might be working with a firm that's saying, yeah, I only work domestically. So our first step with them is to say, OK, well, have you considered digital?
Let's help, let's work with you on that. So they may not be ready for the full, you know, the full set of most complicated highest value transactions, but it's a bit of a journey to get there. And what we find, what's exciting, is that once they're there, the firms that we've worked with that engage in procurement opportunities, once we've worked with them once, they'll repeat. They will repeat six to eight times in several years beyond that. So, you know, we see really positive, there is a positive trajectory, but clearly not everyone is going at the same pace, and that's OK. And some, honestly, some don't want to grow, and we'll also pull back. And that's also OK.
JONATHAN MAZUMDAR:
Let's take one more round of questions. Karthik and, yeah, the woman over here.
KARTHIK:
I'm curious to hear more about when you actually fund some of these larger formal firms. We've heard about how important market access is. I think that the question is, when you have these large or medium to large businesses, are they exporting as well? Are they being able to sell in foreign markets? Are there bad years of doing so? What are they? We'd like to hear more about that.
JONATHAN MAZUMDAR:
Go over here. Let's take a couple. Yeah, one. There was one over here. Yeah. Alright.
NANCY LEE:
Excuse me. Hi, Nancy Lee from Center for Global Development. So I wanted to talk a little bit about this small versus large firms, innovation, and venture capital. So we know that in advanced economies, some of the largest firms didn't exist 30 years ago. So to get to large transformational firms, you've got to start with small, young firms that are innovative. A lot of them don't succeed, as has already been said. We know that innovation is designed for rich countries, doesn't necessarily work for poor countries. A lot of support for domestic innovation and diffusion of innovation doesn't work all that well. So it would seem, and this is going back to Patty's point about investing in venture capital funds, that investing in venture capital funds has potentially very large positive spillover effects. Their capital market gaps, they don't exist. Those markets don't exist necessarily. And the firms that they invest in have huge, some of them, some minority of them have huge growth and job creation potential.
So from my experience working at the IDB lab, which tried to invest in venture capital funds maybe 15 years ago, in the early days it failed. And when it succeeded, the returns were somewhere in the single digits. So it was very different. Below market returns. So it seems to me that if you're gonna talk about what DFIs and MDBs ought to be doing, it's not unreasonable to suggest that they be venture capital market builders and accept these below-market returns so that others can reap the higher returns. So that's a form, I'm gonna bring up blended finance, Patty, sorry. That's a form of blended finance, it seems to me, that has a lot of potential and is scalable, and could be very impactful. So what's your reaction? That's my question.
JONATHAN MAZUMDAR:
Paddy, I wanna give that to you.
PADDY CARTER:
Yeah, and I should have really answered you as well, which is that anything which is like, oh, yeah, we can have loads fail, but we'll make our money on the ones that do well. Obviously, that has to be some sort of instrument with upside participation. If you're talking about debt, you can't say I'm gonna lend loads. But when you go to the smaller firms, it's very hard just to buy ordinary shares in a small business in Sierra Leone and then find someone to buy it back from you five years later. The other thing is that there is a lot of need for innovation of kind of instruments that have that kind of upside participation, but also kind of self-liquidating kind of stuff. The VC thing, I mean, again, that kind of model, you lose money on 80% of your investments. But to make it back, you've got to have to go like, what is it, 10 times, 20 times, 50 times on the ones that win. And there's lots of businesses that just don't have that potential. You've got businesses that they might do well, but you'll make money about three or four times if they do.
And that's not enough to compensate you for having a lot of losses in your portfolio. I guess it is a form of blended finance. If you are simply a DFI and you are willing to have a portfolio of equity investments where you make some commercial returns on average, and you just wear the losses on your balance sheet, and then the ones that succeed prove themselves, you sell them to someone in the private sector, and that's how you mobilize. It wouldn't be counted in mobilization statistics either. But the problem is that you're kind of caught between a rock and a hard place, which is that if you just say, we're DFIs, here's what we do, we invest in funds that don't make any money, also you're wanting to establish funds that are gonna make money and be sustainable and attract money by themselves. So we've got to kind of find ways of doing all those pieces, I think. And you want kind of stories of graduation and being able to, I think it's quite hard for us just to go in with a... we plan to lose money thesis.
In fact, most of us DFIs don't have the ability to do that. Our wonderful shareholder has recently given us the ability to do negative net present value investing if circumstances justify it. And I'd also actually point to AgDevCo, which has just been given some money from the British government again to put equity into medium-sized firms where you're not gonna make VC-like returns from the ones that win. And again, they'll be accepting sub-commercial returns on that portfolio. So I agree with you, it's really important.
BRENDAN MULLEN:
Yeah, thanks, Jonathan. I think a very good question, and I'll get to the other one, maybe with the headline just starting with narrative violation, like we shouldn't call it venture capital, right, for the most part. I mean, it exists, but yeah, that's because we shouldn't be shooting for 80% fail and power laws and quoting, you know, Silicon Valley, it's just, I think it's a little bit silly. I mean, it exists and it can work, but that shouldn't be the, take up as much space as we have here. And so I guess that is my opinion, and yes, it's set you, I mean, our portfolio, we've gotten dividends from profit, dividends that return our investments, we've done management buyouts, vendor financing, dividend recaps, secondary sales, and then yeah, I'm interested in revenue-based financing, I'm still not sold, I think it just comes around to debt again anyway, but at least it's a little bit more innovative. In terms of blended finance, I call it complex finance, and it's generally like people that know how to access it and are willing to do the paperwork and the M&E, and then suddenly 80% of your bandwidth is focused on this, and you're not investing, you're IR, you're investor relations, still good.
One of our funders, SASME fund, has a first loss with USAID, I think that's clean, that's easy. Blending finance, it's complex, I haven't seen it nailed, and it's not flowing the way we all expect it, so I'm not sold on it yet, I wouldn't turn it down, but just don't overload us with M&E, a term I didn't even know five years ago. So yeah, I really go back to that, in a few years Africa will be a quarter of the world's population and we have five basis points of private capital, I mean, I go back to that, it needs more, it will only get more and help the DFI's out if we have returns. So I guess I go to that, like we need to start, have a few funds, make money, show a really good IRR, don't do it in dollar terms, do it in local currency terms, because that's another constraint. And then have anecdotes like Victory Farms, like Native Child, I'll name more of ours, but no, like Victory Farms, and then maybe that's a good segue to a very different question, but yeah, we would love almost all of our companies to export, some of it makes more sense, but once you get into exporting, then you have to deal with cash conversion cycles, and we're talking now supply chain logistics, we actually just invest in a company that does it for perishable foods.
The leaky buckets, getting your product from Joburg to London, I mean, a piece of fruit is touched by 27 different hands, and that's why food is so expensive, so it's, we always, I guess maybe lastly, we would never invest in a company expecting only an export market, because it's a game changer. One of our companies, Rush Nutrition, they sold, they got into Walmart, and that one drop shipment was three times our revenue the previous year. So it's there, and it's in dollars, and we love it, but then if they don't pay us for 90 days, we are broke, and we'll talk about back-end trade spend and all that thing from retailers another time, but it's tough, it really, it kills your margin. So while it's great, it isn't always the panacea that it looks like at first.
JONATHAN MAZUMDAR:
I think we're almost at time. Radha, do you want to, I don't have the last word on that one?
RADHA RAJKOTIA:
I'm good, thank you.
JONATHAN MAZUMDAR:
James, it looks like you might.
JAMES FOSTER:
I'll just say one point on the export stuff. In essence, yes, the large firms that we're investing in are either globally competitive to imports coming in, or they're exporting. I think one of the challenges for us is that it's not always easy for them to be replicated. So we created this lovely new model of tea factories, farmer-owned tea factories in Rwanda, but to replicate it, someone else has then got to put money upfront to buy a tea factory on behalf of the farmers and manage it really well for them and then hand it over over time. So obviously that model was pretty flawed in terms of its ability to be adopted by others. What has been adopted is some of the good practices and so on, but the Victory Films one is one that is working, it is showing an opportunity for others to copy and replicate the mimicry that we're looking for in some cases.
JONATHAN MAZUMDAR:
The good kind.
JAMES FOSTER:
Yeah, the good kind.
JONATHAN MAZUMDAR:
OK, amazing. I think we're at time, so thank you. We could go on for a long time, but that was great. Thank you guys.
- Paddy Carter, head of Development Economics, British International Investment
- Radha Rajkotia, CEO of Building Markets
- Brendan Mullen, Co-founder and Managing Director, Secha Capital
- James Foster, Insights Director, Gatsby Africa
-
Moderator
- Jonathan Mazumdar, Co-Founder, Growth Teams
Coffee Break
3:00 – 3:30 pm EDT
A Community of Growth Champions: Next Steps
3:30 – 4:30 pm EDT
MARK PLANT:
OK, if you can come back in if you're outside and we'll get settled for the last session. We have two distinguished people with us, Stephen Brien of the Artha Global, and then Leonard Wantchekon of Princeton University. They're going to draw the lessons from today and set us on a path to establishing this community. One of the goals of this conference was to start a community around the subject of growth, and I think they'll have some ideas on how to do that. So, let me turn the floor over to Stephen to start.
STEPHEN BRIEN:
Thank you. Thank you, Mark. It's great to have this opportunity to connect with you and to chat through, maybe try and synthesize what we've learned over the last few days. As Mark said, then let's shift focus to thinking how might we all take this forward, take this mission forward as a group. I'd like to start by just thinking through trying to draw together a few strands from the last two days. And obviously, up front, Rachel gave us what I'll describe as the diplomatic articulation of why growth is important, why it's good for us. When we picked up with Lant later that yesterday afternoon, we got the Lance-rant version of it with the strong empirical arguments. We never see poverty reduction without growth. We never see growth without poverty reduction. I'm caricaturing the Lant-rant here. I think Paddy brought up an interesting, I'm looking for where Paddy is now as he left the room having made sure Lant wasn't there when he made his comments. I'm going to try and draw them together.
Lant had a strong empirical argument. Paddy was saying, well, maybe little caveats on does growth always reduce poverty? Does growth always give us well-being? I think there is a resolution here, which is when we're looking at sustained periods of growth rather than the one-off growth spurts, there tends to need to be a political settlement. There tends to need to be a broader social consensus that actually allows that sustained growth to occur. Those preconditions also are the preconditions that make sure resources get deployed towards well-being as well. I think there is a reconciliation, which is that the long-term broad-based sustained growth, as opposed to what you might get in Equatorial Guinea or Angola, has in it the seeds of what's needed for poverty reduction as well. So I don't necessarily see a conflict, but I think there are some nuances that it's really important for us to understand and for us to find a way of articulating so that those who may argue against growth because they worry about some other examples that they see, we're able to be clear what we mean by it and why we can see that there is a reconciliation between, as it were, the long-term empirical evidence and the stories and analysis that Paddy shared with us just in the last session.
And I think we've got some work to do on the communication of that so that we're clear what we mean and we're not over-qualifying growth in a way that allows everybody else to pour all their other ideas into it at the same time. So that's something I think we need to work on. I'd then like to pick up what Abebe said earlier today about policymakers drifting away from the international community. And also Arvind's comments yesterday about that distinction between the argument that may be occurring in DC or in London versus that in Bangalore and Bangui, that in Bangalore and Bangui, the emphasis and the desire is for growth. But as policymakers, as the international community, we haven't tracked with that as much. And I think Thomas was great in a few interjections yesterday and today. So reminding us of the need to think about what do governments in Malawi or other places want, how can we support them? And to remember that actually the successful examples of development around the world have often been where local governments have actually taken the initiative, had the agency and the control to say, this is what we want from the international community.
I think of Botswana being a classic example of that over the years, being very clear about the relationship it wanted with the international community and in effect driving that agenda. And I think it's very important for us to pick up on some of the comments we also heard about as outsiders being humble, not doing, doing no harm. There's a Hypocratic oath here that we all need to take in this environment. Don't build parallel systems that undermine state capacity. I think I love what Stefan said yesterday about there is a value in being dispensable. And that's actually something we can bring to the table, that we can be fired and allow ourselves to do things and then be fired for the sake of doing the right thing. So I think there's a little gem in that, Stefan, I think we need to work on. Adnan also reminds us that's a good quality, policy-relevant research is a public good that we can provide. And we had other comments about other global public goods, but I felt that sort of Adnan's articulation this morning of good quality, policy-relevant research is a really important public good that this community and others can be providing.
I think that when we look at some of the challenges we saw a bit of history going back to 1982, the Washington Consensus, and some comments about how historically fiscal issues have driven the relationship between developing country governments and the international community. And I thought Hakim sort of really brought that to life with respect to, look, we just got to get the payroll sorted by next month. We've got to make sure we've got the money in the bank. It's an existence challenge we've got to start with. And once we've got through that, we can afford to think about growth. And to what extent has the international community created that existence challenge and actually sucked the oxygen out of domestic thinking and required it to be always focusing on the very core existential issues as opposed to the upside that can really make the long-term difference. And then that links into, I think, some of Stefan's observations around elite bargains. But actually, how do we create a situation whereby political survival, which is sort of the essence of politics, is connected to an elite bargain for growth?
And how does growth and development become the tool for political survival? And what are the preconditions for allowing that virtuous cycle to occur? I know, Stefan, you've looked into that. I think that's another area that we could do with exploring more and articulating more. But I think that's important to say and to recognize in that environment, and in all environments, to will the ends is to will the means. And I think when we're talking about these elite bargains for growth, it's not just a nice abstract idea. Actually, this elite bargain for growth needs to have elites who are willing to change, who are willing to accept some compromises for the greater good. And it's not a happy-day scenario. We all just want growth, and therefore, let's go for it. It does mean sacrifices by various people, particularly those in more privileged positions, for the longer-term good. And I think that comes to another point, I think, Kunal, you raised and others did, around the nature of growth and many observations.
There were many comments yesterday and today about India and the change there. But that growth is, sustained growth is a massively disruptive change management exercise. And I think we have to get away from the abstract notion of growth and the indicators of GDP and also think phenomenologically. We have, as Arthur Lewis pointed out, this massive transition from agriculture to industry services, a migration from rural to cities. We talked this morning about cities. And I think what we sort of forget is that over two generations, there is massive disruption on many levels. Where do I live? What work do I do? I used to be a farmer. I've moved into a few other things. My children are now factory workers. My grandchildren are office workers. We used to be in the informal sector. We're now in the formal sector. This is massively disruptive. So it's not just the elite bargain and the disruption of the elites. It's actually, but we want this in a positive way. It is a positive disruption throughout society.
And we need to recognize that many people are going to be anxious about that change. And there are many types of barriers to change beyond just the elite powerful ones. Which moves us then, I think, onto sort of the conversation, the second half of the dueling monologues of yesterday afternoon. Manish, showing us what great entrepreneurial and growth-focused entrepreneurialism can achieve, despite the challenges. Or indeed, perhaps even because of the challenges, by finding those niches where you're solving a problem. And in Manish's case, the employment problem and the acting as an intermediary. I think that's another thing that we'll see in this transformation, this disruption, shifting from survival entrepreneurship to growth-focused entrepreneurship. Where you're going to have new employers, new capital coming in. And ultimately, that will shift the power structure. And that really then is, back to Stefan's point about the elite bargain, the power structure will change. How do we manage that?
How do we bring elites with us so that they can benefit from the new structure and be part of the change agents?
STEPHEN BRIEN:
I think the other thing that we touched on a little bit, I'm gonna call it out sort of explicitly, rather than I think the inference that could be made from some of the comments. And particularly with respect to the later panel yesterday afternoon, where we touched upon industrial policy is that catch up growth is different from frontier growth. Not completely different, but we are in a world where there have been many examples over 150, even 200 years of different types of progress that can be drawn upon. It's not back to our isomorphic mimicry conversation, it's not lift and shift. There's a lot of inspiration, a lot of examples, there's lots of good practice and bad practice that can be drawn upon. And where some of the innovation, a good chunk of the innovation is actually an adaptation innovation. How do I take this good idea that was working over here and change it to work in these circumstances? And I think that sometimes is sort of the sort of lower profile yet critically important type of innovation that needs to be supported and recognized as part of the development plan.
I think the other question that we had yesterday was about the role of the state. And while we were throwing around terms like industrial policies, as I was listening to it, and indeed earlier this morning as well, particularly like the MESA system, there was a lot of micro level changes needed. A lot of perhaps, sectoral specific infrastructure development, sectoral specific ecosystem development. But I think lies sort of somewhere between the grand industrial strategy that may be from a cartoon version with South Korea to a much more nuanced way of doing things. Where you're recognizing maybe what we're talking about with industrial strategy here that seems to be working is selective targeted types of public goods and public infrastructure. Rather than ham-fisted picking of winners, but creating selective opportunities. But that the market test is still very much to the fore of that process. And I think certainly from research that I have done, as I've looked at successful government interventions in this space.
I mean, even South Korea had a lot of market tests associated with it because of course, those winners that were being picked had to deliver against export targets, they had to succeed in an external market. And there are other versions of that around the place as well. So that's one, I think the other bit that I'd like to pick up on, that Devon gave us from an international investor perspective, what were all those preconditions that he was looking for? There was sort of macro stability, good infrastructure, again Manish’s term about the regulatory cholesterol. That was very... He was saying, Dev was saying, we want very little of that. So there's actually a sense of good practice plus then the right level of focused public goods. Which at one level then addresses one of Thomas's earlier points about, “We’re trying to do all the right things, yet we don't get companies coming in." And I think it's not an either-or, it's yes, that foundation needs to be set. So Devon said, as a company, I need that foundation, but I also need a little bit of hand-holding.
I also need a little bit of targeted infrastructure to make it work for these particular sectors. And then I think finally this afternoon, we also saw at a firm level, those are market access issues that need to be sorted out. The right levels of capital, the right engagement from the development community. To help issues like agglomeration work, to help get multiple firms coming together, finding the gaps in the ecosystem those weak links, how to solve those. So there's a lot of range of issues here from the very micro up to the macro. And I was listening I think it was to Arvind, I sort of thought, "Ah, what we've actually got to do is invent a form of what I'm gonna coin this afternoon mesonomics." We have sort of macro policy that sort of fiscal Washington Consensus stuff, which at one level deals with very high level issues. We have a lot of you know, micro or indeed nano exercise we've been talking about. But a lot of the really chunky stuff is somewhere in between those two. And I think we need to recognize that middle ground is actually possibly being some of the most fertile ground that maybe even needs its own discipline.
But I'll leave that as sort of a quick, my sort of interpretation of what we've learned. Leonard does that resonate with you or are there other things that you would pick up on? Or what do you think was missing?
LEONARD WANTCHEKON:
So first of all, I think it was a wonderful, wonderful conference. My comments will focus on what I thought we haven't covered, or at least we haven't covered enough. And this reflects my personal research interest and also my experience as an academic entrepreneur founder of African School of Economics. So the first point that I thought we miss is culture and historical legacies. I haven't heard that word even once, despite the fact that there is a major study showing that if not... I mean, take for instance, Africa and the slave trade, if not for the slave trade there will be the gap between Europe and Africa in terms of growth rate will be reduced by 75%. 75%. This is a study by Nathan Nunn, and the mechanism is one of trust, interpersonal trust. And exposure to slave trade explain up to 25% of variation in slave trade, that's massive. And because of lack of trust, you'll are more likely to see weak contract enforcement. You are going to see firm fragmentation, you're going to see weak access to capital and so on.
Let alone not even talking about internal cohesion of firms, because I mean, if the workers don't get along, they are very suspicious of each other they are not going to work as a unit. And so there are many other studies. For instance, I did a study showing that there is a big growth gap between countries that became independent through violence compared to those who became independent through urban protest. And that's not too far back, we are talking about the 50s. And when you look at the countries in Africa today it's not surprising. It's Libya, Algeria versus Tunisia and Morocco. It's like Cameroon versus Ghana. And I can get even further, for instance, by talking about redistributive norms. There is a lot of studies on how redistributive norm, for instance affect investment. Individuals, for instance, might tend to hide assets because they thought that their sibling are going to go after it. Or they can make completely wasteful investment so that they don't have to redistribute.
But actually in an ongoing study has showed that this even have big effect on firm productivity. Meaning that if you consider the boss of a firm as a father figure, then you expect that he never going to fire you. If for instance, the firm have financial difficulties, OK he'll find a way to pay for it. And then it's worse when you are in places where the labor law, colonial labor law are so strong that you cannot get rid of anyone. So you are forced into bankruptcy if you can even, if you're lucky, if there is a bankruptcy law, because... Anyway, so I mean, I think historical legacies are very, very important. I'm not saying this is destiny, I'm not saying that there is nothing that can be done. I'm just saying that it is something that you need to factor in in a growth strategy. For instance, in a place with low trust, you have to develop institutions that get individuals to talk to each other more often, get mutual commitment from each other. In philosophy there is a process called public reason where you don't, if you pass a law, it has to be a public event that's deliberated, that talked about for everybody to be on the same page.
It's not necessarily in some context, but in other context where you have low trust, this is absolutely important. For instance, mediation, in a place where people get at each other's throat instinctively, then you might need to have someone they can go to try to say, "Well, you know, come on, he's not that bad. Come on, we'll figure out.” I mean, something like that. I'm saying this out of experience because in my own organization, without having a mediator to get somebody that people will be talking to resolve some trivial disputes, there's nowhere I would go. So anyway, so...
STEPHEN BRIEN:
You need to find or create institutional designs that work in low trust environments, and they may be different to the institutions that work in high trust environment.
LEONARD WANTCHEKON:
Exactly. Exactly. So that's basically the point. I think this is an important element that I think we need to consider. And then one other element, maybe if I may? We talk about... OK, lemme put this way. I'm becoming increasingly frustrated by the political economic literature for several reasons. The first is that it's very descriptive, say so and so like you have inclusive institution, you have exclusive institutions, you have corrupt politicians. You have, oh, maybe if you're lucky, good politicians. And then we have political economic constraints. We don't see politics as an opportunity, we don't see politics as something that can be prescriptive. We don't take enough effort and responsibility in trying to think about systems, institutions that can get politician to behave. Because I think, I mean Madison and Kant have way before us have said that, Kant in particular I like his quotes that says, devils can create a republic. It's on us to design a system so that they behave as if they have no evil intent.
And he said, that problem must have a solution. So, which means that what we need by is to think preemptively about what should be in place. What we can do so that we can get close to where we want to be. Let me give you a specific example. So I'm currently doing a study on local government in Benin, super corrupt, performance, very low. But then there is an audit report that comes every year. And after the reports is presented, it's given to the mayor. As we should expect, the mayor doesn't do anything with it. He fire his enemies and equip his friends and business as usual. But then there is a very important element, the audit company, the audit agency will give a higher transfer to a government that improve from one year to another. I came in with an experiment where I said, "When the audit comes in, let's have the staff discuss the content, take responsibility in terms of what is in the report before it goes to the mayor." Result, massive improvement in performance, decline in corruption level.
But then it was at the expense of in-fighting in the staff, but the meeting was done closed door. As a result, none of us know who went at whose throat. So it just shows that we make this corrupt, local government official behave more or less as if we did not have evil intent. By doing something simple, getting them to debate, to discuss closed door audit report. So this shows how we should... OK, but then tomorrow, when I'm talking about corruptions in Benin or in Africa, I'm not going to say, "Oh yeah, those governments are blank, blah, blah, blah." I'm going to say, "They are blank because the mayor has too much power." When the audit comes in, it goes to the mayor, it shouldn't. In between, let's have a deliberation. So then it's prescriptive, it's also... Anyway, if you... I mean, I can go on and on about this, but I think this shows that we need to not just talk about governing capacity in the abstract, in the technical, in very like in technocratic term. We should talk about governments, we talk about state capacity first, which have a strong element of agency.
Because here what we did is to give agency to the staff. We say you... We need some horizontal accountability here. So I think what I'm saying when I talk about government capacity, it tend to be too technocratic. We should talk about state capacity in general, not just what government or elite is doing or not doing, but what people, what the stakeholders themself, what citizens are doing. And think about how we mobilize their agency, how we empower them to help move the governance away from bad to something much better.
STEPHEN BRIEN:
So I think you're starting to touch on an interesting distinction there between government capacity and state capacity. You could just unpack that a little bit more 'cause there seems to be something important there, you're saying.
LEONARD WANTCHEKON:
So government capacity it's basically you can think of basically the government itself meaning the different ministries and the different agencies, the bureaucrats and so on. But when you talk about state capacity, then you are talking about the society at large, because, civil society organizations are part of the states. You are also talking about social cohesion and trust. You are talking about what citizens and group of citizens are able to do for themselves. So you are talking about principles of a high school you are talking about. So I like state capacity more because it's broader, more encompassing than talking about government per se, that's one element. And again, as I said earlier, so when you talk about state capacity and you have a broader notion of what state capacity is, then you are not just talking about competency or technocratic element. You are talking about agency, talking about mobilizing citizens and groups agency. Because it tends to be a missing kind of debate on the growth literature.
So...
STEPHEN BRIEN:
If broad based, sustained growth over multiple generations is something that everybody in society needs to engage in, then it's our collective capacity to do that, not just this body over there called government.
LEONARD WANTCHEKON:
Exactly. Or even elite. Even elite. OK, maybe I'm just going to a mundane example, but short. But I like the example, because it shows what agency is. So when I was in high school, my last year of high school, we lost our math teachers, physics teachers for six months. Because it was a mess up in the school calendar, because the government changed the school calendar from the French one that we had been using to the socialist, Eastern European one, because we were under a military government. We lost our teachers for six weeks. We met, and then we said, what should we do? And then I was nominated to be math teacher of a class to take over from my, you know? And then my other colleagues took over as physics teacher. And then it was one of my best experiences ever, because I was not pretentious at all. I'll tell everyone what I have no clue about. They helped me to understand what it is. And then if nobody understands what I'm talking about, then I'm not moving up, which the teacher will not do, but I could do.
Result, at the end of the year, we were the top high school in the country. I'm not saying there is a causal relationship. There's no causality here. It's purely correlational, OK? But what I like is the fact that those kids said, it's on us. We will do it. We will not sit here and not doing anything and complain the whole year about not having a math teacher. So these elements show, I think, that agency, mobilizing agency, empowerment of groups and citizens, it should be a very important component of development discourse.
STEPHEN BRIEN:
I think if we take that, we sometimes, well, we often see in different countries these sort of islands of strength, where that virtuous cycle has worked. People have been mobilized. Companies have been mobilized. So we see, I think you and I discussed this a while ago, Ethiopian Airlines, for example, as this great island of success, or the Kenyan flower trade, or other areas, specific regions within countries working. What can we learn from that, do you think?
LEONARD WANTCHEKON:
I think the very fact that we look at growth, not just as national phenomenon, but as sectoral or regional phenomenon, it's very, very important. You can say, you can try to pinpoint, say, why in the world, Ethiopian Airlines? Like wars, brutal dictatorship, famine, and they manage to remain the best airline in Africa? What kind of institutional setup? What kind of internal arrangement? What makes it possible? Because we're not talking about Singapore Airline. We're talking about Ethiopian Airline. So the lesson from that could be super valuable. Another element, for instance, I may talk about, (UNKNOWN) EMBRAPA in Brazil, the agricultural research corporation in Brazil. There is a study currently being done by colleagues at Princeton showing that access to research from EMBRAPA leads to 50% increase in total factor productivity, meaning that places where they exist because of publication, because of incentives to produce research, they were able to have major kind of technology spillover to farmers, small and large, and also from one generation to another.
This organization had been around for 50 years, more than 50 years. So by looking closely at those experiences and understand what makes them possible, that's one part of it. By also looking at the huge variation across regions and sectors in terms of growth rate, it will get us a better insight on the mechanism of sustained growth. But it's not something that we do, I think, enough. So we think of Africa, we think of Latin America. But in fact, within Kenya, for instance, within Nigeria, you have Lagos, Lagos that has spectacular success. I don't know if it's sustained over time, but it's a great success story in cities and economic development in cities. So I'm just calling for the need to look at growth miracle that may not be happening at national level, but will have been happening at the level of a sector, or level of an industry, or a region. That's one. And then in the growth analytics, not to just always take the country as a unit, but the regions as a unit, so that we can exploit the massive variation that may exist.
STEPHEN BRIEN:
And this comes back to sort of Adnan's point about policy-relevant research. This is an example of...
LEONARD WANTCHEKON:
Exactly.
STEPHEN BRIEN:
What could be in that field. Also, the Brazilian example also brings up the issue of, say, R&D and innovation. What can we learn from that?
LEONARD WANTCHEKON:
Yes. This is also one of the things I'm very, very passionate about, because I think developments, whether practitioners or development organizations, put such a low bar on R&D. Like the Minister of Education from Nigeria was complaining the other day and said, not only no one tell us that they don't want to talk about technology transfer. Even the big foreign corporations, they don't care about technology transfer. Somebody gave me the example of Cameroon, where China have major dam in Cameroon. Guess what? Big project. All the engineers are Chinese. There was one engineer who also studied in China. He's a translator. He's not an engineer. So I think it's worse than that. Because when you talk about, for instance, let's set up a top-level frontier biotech lab in Malawi. I haven't said that, but I'm just as an example. OK? People are going to say, what?
STEPHEN BRIEN:
Thomas, you're going to need to bring a few friends the next time so you're not picked on like this all the time.
LEONARD WANTCHEKON:
Exactly. People are going to say, what? Biotech? What? But I tend to tell them, I'm three phone calls away from having a biotech company. No, I'm sorry. Not in Malawi, but to be more in Abuja. Because I would recruit a couple of people, put them in an office, connect them with my biotech friends in Princeton. And I say, OK, you guys figure out something to do. And here are issues that I think you can be working on. That's it. We start a biotech lab. And this is essential because they will be working on research that's relevant to the context, research that will be adequate, and it will also lead to an instantaneous jump in research capacity. Because all of a sudden, these scientists based in Abuja will be publishing a paper in the top journal with somebody from Princeton. And that's it. So I think it's that simple. I'm not exaggerating. But this is not something that we think about. It is something that we see as a priority. But it's very, it's really essential. Because I think that universities, and to finish on this, I think that when you talk about it, oh, government isn't doing that.
No, let's, some academic entrepreneur, like the one sitting here, can actually do something. So I don't need permission from government to do what I just said I would do. And then it just reminds me also of Europe, Europe in the 19th century, for instance. All those top scientists doing major discoveries. They were supported by private sector. It's not like the king or the office of the king deciding to invest or not in whatever. No, people I saw a nice documentary by Eiffel, on Eiffel, I'm sorry, who, that's, I was amazed by how much entrepreneurship this engineer had, not only in terms of designing the tower, but also finding sources for financing. And then he was in front of a committee to defend the science behind, this is the type of, this is the profile of scientists that we need today. But they are not coming from the public sector. They are not being appointed by government. They are individuals. So we need to rethink R&D investment as in terms of private entrepreneurship involving academics.
And I think this could be, this could get us a long way into boosting productivity, like in Brazil, I just told you. You know, it's not like in Brazil, and boosting growth as well. So R&D investment, and (UNKNOWN) financing is something that I think is super important.
STEPHEN BRIEN:
So I think we've got four panel discussions organized for next year's summit. I think we've got a panel discussion. Where is Mark and Curtis and Jonathan and Kartik? Are you taking notes? We've got a panel discussion on culture. We've got an answer of historical legacies and how to add those into our growth diagnostics and make sure we're building institutions that fit for the culture. We've got a question about state capacity in addition to government capacity. We've got a panel on sectoral and regional sort of sub-national growth and what we can learn from that. And now your final panel, you're going to be very busy by then. Final panel on R&D and innovation, localizing that. That sort of brings me on to the second phase of this conversation, which is great to be able to have a chat about what we've learned for these last few days. But we wanna take this forward now. I think there's probably several dimensions upon which we might wanna take this forward. I mean, one is start planning for next year.
Look at Mark and Kartik. And build a move, how do we build a movement? How do we get more of the right people in the room? So that's one question. I'm gonna throw a few questions at you, and then we'll open to the floor as well. The second question, it sort of comes back to a comment Lant—you've touched on it a bit now. But a comment Lant made earlier, which is if we were worried about cancer, we didn't have a solution, we wouldn't give up. We'd do the research to find the vaccines, find the remedies. What's the research agenda that this group can collectively contribute to, back to policy relevant research, that we can do? And the third piece, then, is perhaps more practically, as we think about the funders in this room, policymakers in this room, the practitioners in this room. What can we over the next 12, 18 months be doing differently to have a greater impact on growth in the countries we're working in and around the world?
But let's sort of start a little bit, maybe, on the next meeting. Who needs to be there? What type of group should we convene?
LEONARD WANTCHEKON:
I think the group we have now is fantastic. We have a good mix of policymakers, and academics, and economics. Now, I think we may want to bring in, for instance, other the type of development champions. For instance, those who conceive and run EMBRAPA in Brazil, who actually did the dirty work in terms of creating agricultural technology for Brazil. How did they do it? Bring my favorite, no, I'm not going to say this, but bring highly successful firms, like Ethiopian Airlines, or whatever. I'm not talking about people in the mining sector. For instance, people who actually have to innovate, have to so on, and who actually have done it. Who have experience.
STEPHEN BRIEN:
Manish was fantastic yesterday for that very reason.
LEONARD WANTCHEKON:
Exactly, exactly. But then also bring hardcore scientists, people who, for instance, one of the 200 patents that EMBRAPA have in Brazil, one of them will come and say, here is what I did, best in the world. And then I think it will just make it more concrete, that R&D investment is not something for others. It's something for developing countries. So I think that's very important. And then, for instance, because of the real discussion on trade, on market access, I think it's important that people who are the highest level in terms of decision making on trade, you know, like, I don't know, from Europe, or from India, from the US, or from China, what are they thinking, what are they doing, so that we are not going to talk about trade and trade policy from the outside, you know, from, or as a victim like people in those countries who do not have market access. People who have a big decision maker at those levels, it might be good to hear from them and to know what they are doing, what they are thinking, and so on.
And yeah, but then, I mean, another thing that I think it's important is also to be that we are active in terms of matching research to governments. Like, for instance, when I come here, I would like to, for instance, there was one of the former minister from Peru was here, talk about fantastic case of institutional innovation in government, how he turned this organization into something very effective. Well, I wish I knew before, so that I go to him and say, I have a story for you. So how can we improve on it? How can we edit what you have in mind and make it better? You see what I mean? So have research, policymakers, partnerships happening at the meeting, being given by a meeting, is something that I think would be very important. And obviously, with funders it would be great, for instance, if beforehand people doing research, for instance, can already identify potential funders so that the deal can be finalized when we are here.
STEPHEN BRIEN:
We'll have a signing ceremony next year as well then.
LEONARD WANTCHEKON:
Exactly. Yeah, exactly.
STEPHEN BRIEN:
Can I just pick up on the research question? Where would you say the research gaps are? What are the things that we're, what are the questions we're not asking that we should be asking for the sort of within the growth-oriented research? What are the areas, the gaps in our activities in that space?
LEONARD WANTCHEKON:
So for me let me put it this way. I think one of the big, major developments in macro development research is the total factor of productivity and misallocation research. By saying that physical and human, yeah. But at least 50% of the growth is driven by the social infrastructure, by what I would call the seed capacity. You see what I mean? And it has not only trust. You have institutions and governments and is also have research, this kind of stuff. So I mean, this is still black box. The total productivity misallocation kind of is still a bit black box. And the research I'm trying to do in political economy, it's intend to, I think, to contribute to that. But also another type of research that I think would be very useful is, for instance, let me put it this way. So. The same way somebody from (UNKNOWN) will say assume that we want to improve education outcomes for girls by 20%. What do we do? There are three types of interventions, and so on and so forth. That's fine. But then assume that the state governor of Calabar asked me, how do I get 10% jump in agricultural production for the next ten years?
How do I develop an agricultural ecosystem? How do I push this? Something more macro, something more growth-oriented. And then what I would like to see researchers taking on those questions, it's practical in a sense. It's not like growth theory. It's not like cross-national stuff. Is a bunch of local governments that have assets, resources, and they want to do something. I'm saying this concretely because we African School of Economics in Nigeria have been approached by the Cross River State governor to do exactly that. It's the most fascinating project that we could potentially be involved in because we need to work with a number of specialist, macro political economy, labor economics. Not everything will be done at once, it could be done sequentially. But we know it's all related to one big question, which is how do we get Calabar off? You see what I mean? So what I'm saying, this research projects that disaggregated but is a big question, several elements, if we can promote this research, I think this will be a great contribution to this effort that we are doing, because then we are Allah micro development researchers.
We have hands-on working with governments. But then we are macro in a sense, even though we are targeting some local governments. It's multidisciplinary because it's not just education, it's not just this. It's a key element and people joining forces to do their part.
STEPHEN BRIEN:
It's the systems change, though.
LEONARD WANTCHEKON:
Exactly, and then in a very complimentary way. I get two examples obviously there.
STEPHEN BRIEN:
Really helpful. Last question there before we open it to the floor. Let's project forward two, three, four years. This effort that's been kicked off here today and yesterday has been successful. We've really shifted the needle. Funders are coming in. Governments are engaging. The research agenda is developed. We're getting much more effective. What does that look like? What should we be aiming for? What's the moon we're shooting for here?
LEONARD WANTCHEKON:
(LAUGHS) Yeah, that's a tough question.
STEPHEN BRIEN:
We're gotta get it out of you.
LEONARD WANTCHEKON:
Yeah, exactly. I think my wife is not around, otherwise, she will start laughing because he will say something grandiose. (LAUGHS) To be a bit modest. What I would like maybe three things. So first, I would really like to see within three years that macro developments is more... Macro development topics are more covered than it is today. Development has to be about not only studies to understand the impact of this or that, but it has to be also about these big macro question already covered by macro development, political economy, labor. There are a number of young people who are doing very exciting work in that area. But what I would like to see is this to improve. So if we publicize work we are doing here enough, then I'm pretty sure that there will be a momentum in universities among colleagues to bring this on because the problem is not that we are not studying, the problem is that as a field, macro development and growth is something that's really undercovered. We don't have enough students of faculty, in many universities not even taught.
I think that's what I would like to see. Now the second part is really that we have also a stronger representation of students and faculty from developing countries. I mentioned how it would be great to bring those Brazilians in and lecture us on how they made it, how they did it. But then it means that we need to, through mechanism, to make sure that people who have close experience, close insight on the issues that they are better represented. Now, obviously, substantively, you already mentioned several topics that I hope could be of interest, particularly in the political economy and culture, regional variation in growth, and R&D investment, those topics that a bit under-covered now. If there is a sense in which that and others could be covered, I think this will make the debate much richer. So, to finish, I think that I just love the idea that... (LAUGHS) I have one minute to tell you another joke. A friend of mine took me to a president of a country, not to be named, in East Africa.
He's not a democrat for sure. (LAUGHS) And then I went there and he said, "This is Leonard." Leonard is and is and is and is, this is fine. So he put me up there and then he said, this is the president, and then “talk to each other,” and I have nothing to say. Because as a political economist, am I going to tell him that you need to set up inclusive institutions? You're gonna say, are you talking about... There are military guards everywhere. (LAUGHS) If I come up with that idea, I'll leave in handcuffs. But I don't have to. I can say here is a blueprint for agricultural development in the northern part of your country. It's something that can happen under democracy or under dictatorship. Do you see what I mean? It means investment. It means human capital. It means particular research. It means things that do not have to be politically sensitive. I really would like to move to a situation where we can actually have a clear sense of growth at local level in a way that we can communicate in a very simple... (CHUCKLES) Sorry.
I think can communicate to people who should listen. And I think if we can move there... The same way, for instance, when some of my micro development colleagues, when they meet with the Ministry of Education, they can tell them, here is a blueprint for girls' education. I want to take the same approach and talk to the president and say, here is how you develop agriculture. And I think we need to move towards a time where this will be commonplace.
STEPHEN BRIEN:
Great. Thank you. Thank you very much. Really, really interesting. So we've got a few minutes. I'm looking at my very disciplined timekeeper here and I think we've got about five minutes for discussion from the floor. Now, normally at this point, and I remember hearing Jonathan in the previous session reminding everybody that questions end in a question mark. But this time we're gonna do it slightly differently. And what I'd love to get is use this. You've all been here for the last two days. Rather than ask us questions, I'd love to get your thoughts and suggestions about how we build this movement, take it forward. What type of convening should we be doing? Do you agree with Leonard's views about what research we should be doing? What type of blueprints do we need to be creating? How do we change the way we engage so that we're more effective? I'd just love to see a sea of hands and lots of great suggestions. There's one hand there, one hand there, and one hand there. Great. And more plenty.
Excellent. So let's get going. And Leonard and I will actually try not to respond too much so we can give everybody a chance.
LEONARD WANTCHEKON:
Absolutely not.
STEPHEN BRIEN:
That was aimed at you, Leonard.
LEONARD WANTCHEKON:
(INAUDIBLE)
PATRICK LAMSON HALL:
So I'm Patrick Lamson Hall. I'm from NYU and also the African Urban Lab. And I'm not a development economist. I'm an urban planner. So to me, the big remarks landed yesterday heavy. And I found myself thinking that this debate between all countries are pro-growth versus no countries are pro-growth, there are only a handful. Made me think that it would be useful to have some simple mechanism we could use to distinguish countries that are actually pursuing growth-focused agendas and have an elite consensus from the countries that do what everybody does, which is say they care about growth, but actually, they're not doing anything. So I'd like to see that.
STEPHEN BRIEN:
Thank you. Anyone here? Yeah, go ahead.
SHEKHAR SHAH:
So I'm Shekhar Shah. I'm a nonresident fellow here at CGD, but also used to work at the bank for over two decades. I love Leonard's comments. The thought that's been running through my head in pushing for growth, when you have governments that form alliances with certain parties, crony capitalism starts happening, you do get a level of growth, but then you are suppressing a lot of the initiatives across society. And how do we deal with that, and should that be a session as well in these deliberations?
STEPHEN BRIEN:
They're going from deals to rules. Jonathan there. Behind you Jonathan.
JONATHAN SAID:
Thank you. So I asked a question about this earlier, but I don't think I get an answer, so I'm gonna propose an answer if I can take advantage, which is very keen to see support structures put in place. So this maybe is more for the practitioners, but together with the funders, cause I do think it's a question of how the funding community can also provide the right type of funding that then allows the right type of support structures to the people in government, the Thomases of this world and the Piero Ghezzis of this world, as well as in parallel, people pushing in the private sector, business models that are innovative and driving change from the private sector side of things. How do we get support structures to those guys, the entrepreneurs, as Devon was saying, the growth-oriented entrepreneurs and the government entrepreneurs, if we can call them that, who are facing day-to-day challenges, putting their money at risk or their political capital at risk? How do we empower them to achieve more within their context and through them, drive the learning by doing at private sector level and government level, and then the growth coalitions between the two to drive specific change to get the shrimp into China, et cetera?
And that's I think that support mechanism is what's largely missing and what we need to focus on.
STEPHEN BRIEN:
Thanks. Was there a hand up over there. Sorry, I missed it. (INAUDIBLE)
ATTENDEE:
Maybe just to add to that, if we can... We're trying to do something similar in Tanzania. I know you've been doing some work in Malawi. We need to share more on this. We've got projects happening. We've got things going on to Jonathan's point. Can we do more of those and can we compare and contrast what works?
DARNLEY HOWARD:
Hi, I'm Darnley Howard, President of (UNKNOWN) International, and I'd like to see how we can take some of this thinking beyond this room, beyond our international development community into the broader population so that we can think about how we can learn from each other, how growth in these countries will benefit other folks whether it's the various diasporas around the world, whether it's other industry groups in Silicon Valley, whether it's family offices, it could be any number of various communities and interest groups that could benefit from some of the ideas that are being kicked around here and that we could benefit from what they're doing. There's a lot going on in urban development and economic development here.
Some of that could possibly be applied in other places.
STEPHEN BRIEN:
Question up here at the front. And then I think on Devin. And let's do two more questions or two more suggestions and commitments to do things and then I think I'm gonna find my time cut out.
CHRIS MACRAE:
I'd like to see growth as a student union club go all through universities. And maybe you could do two-minute TikToks of 20 sorts so that there was a program that went throughout the year. And if that meant that some professors disappeared and others ascended, and there was much more action, learning, and movement...
STEPHEN BRIEN:
Make growth cool again. Very good.
DEVIN CHESNEY:
I'm Devin Chesney with the Aspen Network of Development Entrepreneurs. The voices of our members who implement programs that help drive growth by actually working with firms to make them stronger and faster growing, I haven't heard a whole lot of that voice here. I would like to see that. But I think there's a lot of potential for the academic and policy conversation to intersect with what the practitioners that work with entrepreneurs every day. So I'd like to play a part at any part I can in bringing those universes together and finding more ways for them to collide.
STEPHEN BRIEN:
Great. Thank you. I think that is our time up. I'm looking for Kurtis, who's gonna come and close us out. You're hiding there, sorry. And then...
KURTIS LOCKHART:
Give a round of applause for the last... (APPLAUSE)
LEONARD WANTCHEKON:
Thank you.
KURTIS LOCKHART:
So just a few words. That was a great way to end the session on I think growth TikTok's. The takeaway after two days is fantastic. Thank you all so much for coming. We appreciate it. Can we give a round of applause for all the speakers that we've heard over the last two days? (APPLAUSE) Fantastic. Including these guys. And then obviously something like this takes a lot of planning. We're appreciative to the teams at the CGD, at growth teams at CCI. Can we give a round of applause for the organizers as well? (APPLAUSE) And then obviously, this costs money. So thanks so much to the sponsors, Open Philanthropy, Bridgewater. You guys have been fantastic. So again we hope that this is the first of many such summits. A couple of housekeeping items. So number one is those of you who have this piece of paper, you see a little map on here. We are having drinks at Mission DuPont. It is at 20th and Q Street. So you're welcome. We'll come and have further conversations about growth. We can come up with some TikTok ideas and mingle.
So again thanks so much for coming. We appreciate it very much.
LEONARD WANTCHEKON:
Thank you.
- Leonard Wantchekon, Professor of Politics and International Affairs, Princeton University
- Stephen Brien, Visiting Senior Fellow at Artha Global, Senior Fellow at the Future Africa Forum, Chair of the UK Social Security Advisory Committee
