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Global Winners & Losers: The “Elephant” Diagram

By Shlomo Maital

Source: World Bank: Christoph Lakner, Branko Milanovic, 2014

     The above diagram tells the story. On the “X” axis: the global distribution of income, from the poorest 5% to the richest 5%. On the “Y” axis:   the global rate of growth of the income for each of the 20     5% groups.   The time period is the two decades, from 1988 through 2008. In these two decades, the Berlin Wall fell, global trade boomed, China grew by double digits, Asia prospered…and then it ended, in 2008, when the ceiling fell, with the global financial crisis.

     The diagram has been dubbed the ‘elephant’ diagram, because it does look like an elephant, trunk and all.

       What is the story it tells?   The poorest 5% were left out – their incomes did not grow at all. The ‘middle class’ in the poorer countries, mainly China, enjoyed strong growth. The ‘middle class’ in the wealthy countries were hard hit — the 80th percentile did not grow at all, in income.   And the top 5%?   Their income soared.

     Now — looking at elections in the UK, in the US, and elsewhere — I think you could have made strong predictions just based on the ‘elephant’. A large underclass, in the left-out economy. A large middle-class hard hit and struggling. A wealthy elite, able to buy political influence. The rising economic power of China.

     Britain’s Labor Party leader Corbyn was crushed, because he lost touch with his voters. There is a real and present danger that the Democrats in the US may do the same – though I understand, they are studying the UK election closely.

       The two groups of big-time losers, in the elephant diagram, will stay home or vote against you, if you ignore what matters to them and if you ignore policies that they believe will help them. It happened before – it could happen again.*

* “Lakner & Milanovic: “democracy is correlated with a large and vibrant middle class, its continued hollowing-out in the rich world would, combined with growth of incomes at the top, imply a movement away from democracy and towards forms of plutocracy. Could then the developing countries, with their rising middle classes, become more democratic and the US, with its shrinking middle class, less?”

July 1-22, 1944, Bretton Woods, New Hampshire:

The Forgotten Anniversary

 By Shlomo Maital  

Hotel Mt. Washington, Bretton Woods, NH

    Today, July 20, the 50th anniversary of Neil Armstrong’s Apollo landing on the moon – and all the media are obsessively recounting, replaying, and reliving it. We learn about the world-shaking debate, whether Armstrong said “one small step for A man”, as intended, or whether he skipped the “a”. (Complex voice analysis has been done to resolve this world-shaking question).

     There is another anniversary, ignored – and far more important:   The 75th anniversary of the Bretton Woods, New Hampshire, conference, July 1-22, attended by the Allies, that redesigned the architecture of the world economy. It was done in 21 days, because the wealthy Boston millionaires had booked the Hotel, Hotel Mt. Washington, for their summer vacation. That is symbolic, because ultimately, it is the 0.001% billionaires who are destroying the amazing system built in just 3 weeks in New Hampshire.

     Leading the US delegation was a Treasury official, a bureaucrat, Harry Dexter White. Leading the British delegation was the most renowned economist of his time, John Maynard Keynes. Keynes had the intellectual firepower. But White had the powerful US economy behind him. Keynes’ plan was to create a world central bank. White said, no, we already have one – the dollar will be the world’s currency.

     White won.

       At the beautiful old wooden hotel, the delegates created the I.M.F., World Bank, General Agreement on Tariffs and Trade and the Bank for International Settlements. They laid the foundation for a global trading system with zero tariffs (“Most Favored Nation”) that led to massive creation of jobs, exports and wealth, mostly in Asia but in war-torn Europe as well.

       The system created in Bretton Woods 75 years ago has served the world well. It helped China boom, as well as Japan, Taiwan and Korea, and India too. It helped Europe unify. It may have prevented a new World War. And ultimately, it sank the U.S.S.R. by showing that free markets worked best.

       The Bretton Woods agreement has affected everyone, mostly for the good. But – it had a fatal flaw. When you create opportunities for some people to grow wealthy, by definition you also create dilemmas in which many people (unable to compete) become poorer. So what was lacking at Bretton Woods was one thing – a truly effective mechanism to redistribute wealth, for people and countries left behind.

     Ultimately, that small omission is destroying the Bretton Woods system. It is bringing ‘populist’ leaders who ignite trade wars, foster xenophobia, build walls and claim to prioritize their own countries, other nations be damned.

       Let us celebrate Bretton Woods’ Diamond Anniversary. Let’s remember the enormous benefits it brought. Let’s remind ourselves that much of the Bretton Woods system is worth preserving and strengthening, while fixing the flaws.

       I was two years old in 1944. Most people alive today were born long after Bretton Woods. Most do not even know what was done at Bretton Woods or how it affected them.

       I wish the media could leverage this crucial Diamond Anniversary to remind everyone, to educate people, to reaffirm the ultimate value to humanity of free, open trading, of commitment to creating value for the world, not just for white American males, and to take responsibility (as the US did in 1944) for struggling nations left behind.  

         I just searched Google News. The Financial Times did print a couple of pieces on Bretton Woods. So did TIME magazine.  It’s barely a ripple…not even that.


One-Armed Nobel Candidate Economist Is Fired

By Shlomo Maital


        Paul Romer                              Paul Krugman


       Every day, members of my profession, economists, find new ways to make me deeply regret I ever became one. The latest episode is a story of two economists named Paul.

       President Harry Truman, the US President who suddenly and unexpectedly took office when President Roosevelt died in 1944, once said famously: “Give me a one-handed economist! All my economists say, ‘on the one hand…and, on the other’”.  

       Economists respond: “Give me a break, Truman!   We are objective professionals. Our job is to offer alternatives and explain the implications of each. YOU are an elected official. We are your servants. YOU are the one elected by the democratic process to choose and decide, not us! We simply show you the choices.”

         I myself used to repeat that mantra, during a year as head of an Israeli government planning body. But I soon learned – reality is different.   When economics is a value-free zone, it is useless to political leaders. State your values, state your position, clean up the jargon, speak in ordinary language, and keep one hand anchored deeply in your pocket.

     The Guardian now brings us a shocking, infuriating episode in which a future Nobel economist is fired for demanding clarity and truth. The economist is Paul Romer. In his Ph.D. dissertation, he built a powerful new theory now widely accepted, called “endogenous growth theory”. But another Paul, Paul Krugman, a Nobel laureate, has for over two decades been a beacon of clarity and one-armed economics.

       In brief: Since MIT economist Robert Solow, we’ve known that half or more of all economic growth is caused by technological change. But Solow treated it as ‘exogenous’, outside the system. Romer observed that technological change is endogenous – it is created by what we do, in education, innovation, and R&D, etc.   His two Journal of Political Economy articles published in 1986 and 1990, respectively, started endogenous growth theory and changed the world.   He will win a Nobel Prize soon for this. It has changed the way everyone thinks about pro-growth policies and plans.

The Guardian: “The chief economist at the World Bank has stepped down from its research arm after staff were vexed by demands to write succinctly, including cutting superfluous uses of the word “and” in reports or emails. Paul Romer, 61, will leave the Development Economics Group (DEC), according to a staff announcement reported by Bloomberg. He had asked for shorter emails, while also cutting staff off if they talked for too long during presentations, it said. In response to press inquiries about internal “objections to my insistence on clearer writing,” Romer published writing guidance he had issued to DEC staff on a blog on Thursday.   He said he suffered from dyslexia, making writing hard, but added “everyone in the Bank should work toward producing prose that is clear and concise. This will save time and effort for a reader. Thinking about the reader is an example of what I mean when I say that we should develop our sense of empathy.” Romer cut more US$1 million in annual expenses from the DEC budget, a body of more than 600 economists. But it appeared to be his attacks on convoluted, lengthy reports of that researchers took cause with. In an email to staff, Romer argued that the bank’s flagship publication, World Development Report, would not be published “if the frequency of ‘and’ exceeds 2.6 percent,” according to Bloomberg. He reportedly cancelled a regular publication that did not have a clear purpose.”

     “Romer is credited with the quote “A crisis is a terrible thing to waste,” which he said during a November 2004 venture-capitalist meeting in California. Although he was referring to the rapidly rising education levels in other countries compared to the United States, the quote became a sounding horn by economists and consultants looking for a positive take away from the economic downturn of 2007–2009.”

     Paul Romer wanted one-handed economists, who speak clearly, and paid the price. But is there a role-model for clear-thinking clear-speaking economics? There is. New York Times columnist Paul Krugman.

       The Economist: “From a mono-manual perspective, at least, Harry Truman would have loved Paul Krugman, an economist who rarely hesitates to take a bold position—even when the subject is himself. In recounting the transformation of his twice-weekly New York Times column from a genial discussion of the “New Economy” into a widely read broadside against the Bush administration, the Princeton professor recently described himself as “a lonely voice of truth in a sea of corruption.”  

     Krugman has blasted Trump and the Republicans, and identified their scorn for economic truth.

     In the 1930’s economics took a wrong turn. Influenced by the London School of Economics, economists decided to become like physicists and deal with only ‘pure science’, without ethical value judgments. At that moment, economics became irrelevant. And it remains so.

       I hope Romer wins the Nobel Prize later this year. In his acceptance speech, I hope he tears several strips off the moribund walking-zombie economists there, hundreds of them, a whole building full of them at 1818 H Street in downtown Washington. That building is a wasteland desert, even though it is in the heart of Washington.

Will Paul Romer Be the Cat Among the World Bank Pigeons?

By Shlomo Maital  


Paul Romer – New World Bank Chief Economist

      The World Bank was created in July 1944, at Bretton Woods, NH, and has as its goal spurring growth among poorer countries by helping them  borrow capital for infrastructure projects. Repeatedly, the modern relevance of the World Bank has been questioned, when, in a globalized world, nations that run their economies well can access world capital markets by themselves – and nations that do not won’t get World Bank funding anyway.

     The relevance of the World Bank depends on understanding what are the underlying factors that drive growth. For years, economists simply did not know. Here is what The Economist says:

     Prevailing models of growth assigned an important role to technological change, but lacked a convincing explanation for how it came about. Instead, the models treated new ideas a bit like manna from heaven, arriving in a mysterious and unpredictable manner.

   Prof. Paul Romer had a different theory.  

   Mr Romer sought to change that. His work made the development of new ideas “endogenous”, meaning that it sought to account for them, rather than writing them off as “exogenous” surprises. In his “endogenous growth” theory, new ideas materialise as firms invest in physical capital or research and development, creating knowledge that spills over to the rest of the economy. That suggests that open economies, with institutions that encourage investment in physical and human capital, ought to do best.

   The importance of the quality of institutions and of the dissemination of innovation led Mr Romer to focus on urban areas, which are often hotbeds for the creation and transmission of ideas. That focus, in turn, sparked a radical notion of economic development oriented around “charter cities”. Poor countries, he argued, should create new cities and give them leeway to experiment with daring economic and political reforms.

I know Romer is right. Israel has startup cities, like Tel Aviv, that are vibrant entrepreneurship ecosystems. Berlin is one; so is Silicon Valley (a region, not a city); Research Triangle (N. Carolina); Cambridge, UK, and so on.

Will Paul Romer change the thinking of that Old Lady, World Bank, with its old-fashioned stodgy theories? Will he leverage the World Bank’s lending power to foster entrepreneurship in poorer nations?

Stay tuned!


Blog entries written by Prof. Shlomo Maital

Shlomo Maital