Ethos Issue 4, Apr 2008

The Challenge of Growth
Interview with Paul Romer

Universities are very important as both the performers of research and as the trainers of people who will go out and create value in the rest of the economy. On the training side, you now face two distinct challenges. You need a mixture here both of institutions where lots of students can get in (which helps raise human capital for the whole economy), but also of some other institutions that are amongst the most selective in the world, that some of the very best students in the world will want to apply to. In some ways, you might think of the Indian Institutes of Technology (IITs), as an example outside the United States.

In your view, what are the key challenges facing governments in creating the conditions for economic and technological progress?
One of the lessons that is coming out of the academic work I have been doing on the Growth Commission¹ is that good management and good leadership is very important for governments, just as it is for companies.

A lot of countries have viewed government employment as kind of a social policy or a form of patronage. They think that you give government jobs to people who are poor to help them have a better quality of life, or you give government jobs to people in your party to help build your political base. Both of these approaches can result in a bureaucracy where people are not well-matched to the government jobs that they are doing, or in too many people employed by the government, with average salaries that are too low. Singapore is distinctive in trying to attract very talented people, and in keeping the number of people in government relatively small and paying those people well. This way you can attract people from the private sector. This is a simple insight, but few governments have been this thoughtful or consistent about this as Singapore has.

The other challenge in good governance lies in dealing with two fundamental problems. The first problem has to do with time horizons. Many political systems create pressure to respond immediately, or the political process deters the adoption of policies which will cause some pain now but gain in the future. So “now-versus-later” is a huge problem in managing politics in governments. We have created some special institutions like independent central banks to address precisely this problem.

Because Singapore’s political system has a dominant party that can form a strong majority government that expects to be in power in the future, Singapore has done a good job in managing “now-versus-later” issues. Because the party expects to be in power for a long time, it takes a long view in addressing problems. Because it has a strong majority, it can take actions that cause some pain now without being thrown out of office. Your political equilibrium would be difficult to replicate in most other countries, but some countries like Italy would probably be well advised to move in your direction, toward a political system where they are more likely to have strong majority governments.

The second problem that governments face is “winners and losers.” Almost any policy you can imagine that would benefit large numbers of people will typically cause some losses for other people. Most effective governments have to decide that there are times when the gains for most people are so large that they are willing to accept some losses for others along the way. This is generally acceptable if you think that those who lose on today’s policy might be very different from those who lose tomorrow. In the long run, it will tend to average out, but you need a government that is strong enough to go ahead with the policy even if there are a few very vocal people who do not want it.

Can growth be sustained indefinitely, assuming shrewd governance? What are the prospects for growth in Singapore and the region in the long term?
One problem that Singapore will face—as will China and India—is that the richer you get, the more your growth rates will slow down. It is inevitable that once you get to the leading edge of income per capita, you lose the benefits of fast growth from catching up. Many governments have trouble adapting when the economy shifts from very high growth to slower growth.

One of the hopeful signs about Asian development generally is that there is a fairly broad consensus now about the gains from trade—a consensus that trade is good for all participants. Increasingly, people recognise that it is not just trade with the United States but trade amongst themselves that can be beneficial. This is a wonderful development because there are enormous gains from trade at the level of the growing countries in this region. One of the unintended consequences of a recession in the United States and a slowdown in imports from the United States is that governments and entrepreneurs worldwide start asking where else in the world they can sell to besides the United States. This will further encourage the development of more trade between the developing countries and the world, rather than just with the rich nations today.

One of the most important lessons from history is that growth continues and even speeds up when more people are innovating and trading with each other. Steadily expanding trade will help this region and the world increase the rate of discovery. With good policy that supports increased economic integration, growth at the rate that the US achieved in the 20th century, or perhaps even growth at somewhat faster rates, can be sustained into the foreseeable future.

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