The Next Convergence

The Future of Economic Growth in a Multispeed World

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India and China are set to converge to lifestyles and consumption levels similar to those enjoyed by the industrialized countries. The rise of these new economic giants puts enormous strain on the earth’s biosphere. At the same time, their rise poses challenges to the structure of employment in the United States and other industrialized economies, as low-value-added jobs migrate to emerging markets. These are the central themes of this INET interview and of Nobel Laureate Michael Spence’s book “The Next Convergence: The Future of Economic Growth in a Multispeed World”.

The world economy cannot triple in size using the existing modes of production. “It just won’t work”, says Michael Spence in part 2 of this INET interview. China and India have figured this out; there, the state intervenes in markets quite substantially, going so far as to constrain lifestyle decisions that American citizens normally would consider as free choice. To get on a sustainable path, will the United States be forced to do the same?

The US economy has been pretty good at generating jobs in the years leading up to the Great Recession. But nearly all jobs were created in the non-tradable sector, while employment stagnated in sectors that face international competition. Michael Spence is seeking answers to the employment challenge: how to generate jobs in the US when low-value added activities migrate to emerging markets?

Nobel Laureate Michael Spence favors a consumption tax: a big chunk of government revenues should come from taxes on value added and consumption. Besides a sensible energy policy, Spence’s agenda reads jobs, jobs, and jobs. The tradable goods sector needs to become an employment engine to replace those jobs that were the result of asset bubbles, excess consumption, and the swelling of health care.

While manufacturing employment was crumbling in the United States, Germany gained shares in world markets: exports boomed, and the tradable goods sector remained an employment engine. That is why Michael Spence looks to Germany, as a role model of successful adjustment to international competition. The Germans identified an economy-wide competitiveness problem around 2000; as a response unions, business, and government cooperated to meet the challenge of international competition.

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