Ideas Untrapped

Welcome to Ideas Untrapped podcast. In this episode, I talk with economist Robin Hanson. This episode is about an everyday exploration of some of Robin's biggest ideas. We discussed the hidden motives behind our everyday behaviours and how they shape institutions like education, healthcare, and government. We explore his ideas on signalling, innovation incentives, and alternative governance models like futarchy. Robin also discussed his latest idea of Culture Drift: how humanity's superpower of cultural evolution can tend towards a maladaptive direction. Robin thinks this explains worrying trends like persistent low fertility at a time of material abundance, and he also explains why we are reluctant to confront this problem despite our common practice of cultural entrepreneurship.

Robin Hanson is a professor of economics at George Mason University. He has written two fantastic books, Age of Em and The Elephant in the Brain (co-authored with Kevin Simler).

You can find all of the ideas discussed in Robin's books (linked above) and on his popular and immensely brilliant blog Overcoming Bias.

TRANSCRIPT

Tobi: Welcome Robin, to the show. It's an honour to talk to you, and I look forward to our conversation.

Robin: Let's get started.

Tobi: Okay. So I'd like to start with your book, with Kevin Simler, The Elephant in the Brain. You argue that much of our supposedly noble behaviour from charity to healthcare to politics is actually driven by hidden self-serving motives like signalling and status seeking. If so much of human activity is essentially about showing off or gaining social points, what does that imply for how we should design or reform institutions?

Robin: Well, the key idea of the book is that in many areas of life, our motives aren't what we like to say. And this fact is well known to psychologists, but not so well known to the people who do policy in each of these areas, like say education or medicine or politics. The people who do policy in those areas tend to take people at their word for their motives and they analyse those areas in terms of stated motives, and our claim is that you are misunderstanding these areas if you take people at their word and you'll get a better sense of what's going on there and therefore what you can do if you would consider that people might not be honest about their motives.

Tobi: Yeah, I mean, for example, schools, hospitals, and other public or perhaps even private institutions that we interact with openly acknowledge or accommodate our signalling drives rather than pretend that we're always pursuing high-minded ideals. What are the hard parts to reconcile about these facts of the human nature?

Robin: Uh, well, for example, people in the United States are most surprised by our medicine chapter, where we say that in fact on average people who get more medicine aren't any healthier and therefore they're spending way too much on medicine for the purpose of getting healthier. That's very surprising to people and it, of course, suggests that we don't need to spend as much as we do. Instead of subsidising it, maybe we should even tax it. But it also helps understand why we are doing as much as we're doing because we're using it as a way to show we care about each other rather than a way to get healthier. And so if you want to spend less on medicine, you'll have to ask, how can we find other ways to show that we care about each other instead of overspending on medicine?

Tobi: On a personal level, has recognising these uncomfortable hidden motives changed how you live your own life or conduct research? Do you ever catch yourself in acts of self-deception or signalling and you then consciously adjust your behaviour?

Robin: I think many people are tempted to try to look inside themselves to figure out what their hidden motives might be, and I don't think that's going to work very well. So my approach is just to look at how people on average are, and ask what motives best explain typical human behaviour and then just assume I'm like everybody else. So, I have come to terms with accepting that my behaviour is driven by motives that are probably not too different from the motives that drive most people, most of the time. So if other people are going to the doctor to show they care. I probably do too. If other people are going to school to show off how conscientious and intelligent they are, then that may be what I'm doing as well. And I'm just going to accept that I'm just not going to be that different from other people.

Tobi: Over the past, I would say six years or so, particularly with the rise of what is generally termed as woke, the phrase virtue signalling became quite popular. And this is something that you have been writing about before it gained that currency. You've noted that humans, when times are good, devote more energy to visibly displaying values either through charity, moral causes, patriotic posturing, as a way to boost our social standing. How do your theories of hidden motives and signalling help explain the way people behave online? And how does that affect the rise of political polarisation in the US perhaps?

Robin: So the term virtue signalling is usually used to describe behaviour that the speaker doesn't think is very virtuous. Um, so when we signal in general, typically our signals are effective and that we are actually showing the thing we claim to have. So if by going to school you show that you are smart and conscientious and conformist, then typically if you go to more school than other people, you are in fact more conscientious and conformist and intelligent than other people. You are successfully showing that. So the analog, if you took it literally for virtue signalling, would be that you are showing that you are virtuous. And that should be good. Maybe it's not so great that you are so eager to show it, but it is a good thing about you that you'd be showing. So the phrase virtue signalling is instead a criticism of people who are trying to appear virtuous without actually being very virtuous. That's, I think, the implication of the claim. And so that certainly could be happening and we should certainly wonder whether people who are claiming to be virtuous actually are virtuous. So certainly a lot of what's happened on the internet in the last ten years is what they call cancel culture and so that's where a particular person is accused of being bad or doing bad and then a mob, you know, jumps all over them and maybe gets them fired, gets them, uh, you know, thrown out of an organisation, gets people to quit their YouTube channel, et cetera, because they have been accused of being bad. Then the question is, well, if in fact they are bad, and if in fact these sort of responses are the appropriate response to someone who is bad in the way they are claimed to be bad, this wouldn't be such a terrible thing. Uh, the claim is that in fact they are accusing people of things they aren't guilty of or vastly exaggerating their guilt. And then it's bad if people are going way overboard to cause them harm without good cause.

So certainly one of the things that's going on in the world is the difference between gossip and law. So, uh, law didn't really exist until, say, 10,000 or so years ago. Before that, for maybe a million years, we had gossip. And the way we managed people doing bad things and dealing with that was by gossiping about it. And we mostly lived in pretty small groups who knew each other pretty well, so it wasn't that hard for people to gossip and figure out what's really going on and then react by whatever way they chose to do when they talked about it together. But in much larger societies that we've created in the last 10,000 years, gossip doesn't work so well. Because there's this incentive to a rush to judgment. When somebody comes to you with a complaint about somebody else, your main incentive is to agree with this person in front of you who you know better than the other person being complained about. And so in gossip, people tend to believe whatever they're told and they don't get the whole story. They don't ask for the other side of the dispute. And law was invented substantially to overcome this problem with gossip wherein there's a central place that you take an accusation to and that central place's job is to hear all the evidence before they make a decision. And then that overcomes the rush to judgment.

But when we have things people disapprove of that aren't illegal, then we revert back to gossip and then we have the problems of gossip wherein people are too quickly agreeing with an accusation before they've looked at the full, um, evidence from the other side. That's something that's going on lately with new social media when there are many accusations that many sympathize with that are things that aren't and not, in fact, illegal. But these are all relatively minor variations on the basic thesis of our book, which is that people are trying to look good and they do many things in order to look good, but when they do, they are actually good. On average, they are showing things that are actually good in order to look good.

Tobi: An idea that also become quite popular first in scholarly circles, but I mean, I see it almost everywhere now, maybe that's not a statistical fact, but it's the idea that evolutionarily, humans are not truth-seeking, we are coalition-seeking and our reasoning is basically to get people on our side. Looking at social media and how people use it, would you say that it's fundamentally amplified our worst signalling instincts by rewarding outrage and performative statements? And do you think it can somehow be a harnessed to improve honesty and information sharing?

Robin: So the thing I can be the most sure about is just looking overall at human behaviour across the world, across history, and roughly describing the middle of the distribution of that human behaviour and what's going on there. That's what the point of our book is about and that's what I feel most confident about. When you go to try to explain differences between some places and others or differences across time, you have to dig in deeper into the details of what's happening in your data about that in order to draw conclusions about those smaller differences. And honestly, we were just wrong about the basics here. So our book is saying that look up until our book or recently, people have been pretty wrong about the very basics of what people are doing on average across time and space. And so that's what our priority was, is to try to figure out just what are people doing in the typical situations. And because that was hard enough to figure out, maybe we shouldn't be very confident in our ability to judge differences in time and space. So, recently there have been some changes in the world in terms of social media, for example, and many other changes, and many people are eager and interested in tracking those changes and predicting their consequences, but... honestly, that's just a secondary priority from my point of view. Uh, I don't think I can judge as well. So we do have a long history for many centuries when any time there's a new element in the world of communication or, um, talk, people have disapproved. And they have complained about the new thing compared to the old and for novels, for example, and the telephones and video games and TV. Pretty much any substantial change in the way we get information and share with each other, people have criticised as making things go bad, and no doubt some of them were on average bad, and some of them were good, but I just don't feel like we can tell very well, uh, certainly at the moment, very recent changes in which ones were good or bad, how.

Tobi: So, I mean, before I move on from that line of questioning, as someone who call out uncomfortable truths and who has had some brushes with online outrage, generally. How do you personally navigate online conversations where image conscious signalling can really drown out sincere debate?

Robin: So compared to most people, I've chosen my role in the world to be a certain kind of intellectual analyst, a certain kind of person trying to figure important things out near sometimes uncomfortable topics. So I just feel it's my job to take whatever hits that are coming from doing that. And I think I have suffered some hits where people made accusations against me which I didn't think were fair but still cost me in reputation terms in some eyes. And I just feel like that's gotta be my job.

Now, honestly, actually, the biggest times when people complained about things I said were about pretty minor things relative to my whole main area of research. So... had I anticipated those particular things being what would bother people the most, I might have just not mentioned them out of the practical constraint that they weren't actually that important. Basically, side comments, often on gender, have been the things that have most bothered people about what I've said, mostly because I think... people believed other people's claims about what I intended when they were wrong.

Uh, look, compared to most societies in history, we have a lot more freedom to say things and think things and share them with each other. And even if we do suffer some penalties, they are still vastly less than people in the past have suffered for such things. So I still gotta think I've gotten off easy compared to, heretics or, uh, you know, people who give disturbing thoughts in history.

Tobi: So I'd like to move on to foragers versus farmers. You've written about the deep tension between our ancestral forager mindset, which is egalitarian, expressive, novelty seeking and later farmer mindsets, which is hierarchical, discipline, abstinent. And the cultural conflicts today, you say, can be traced to this clash. Uh, you've also written that wealthier societies are gradually reverting to more freewheeling forager values in many domains. Can you expand on this idea a bit and its implication broadly?

Robin: There are many long-term trends that people are eager to explain. You were just talking previously about recent trends in social media, but there are trends on many different timescales. And one of the most common interests that people have is explaining trends. What things have changed, how? So, in thinking about trends in the last few hundred years in the modern era, there are a number of consistent trends that are hard to explain. And so I, you know, ten or fifteen years ago, looked to our longer term history for a framework to explain these more recent trends. So the key idea here is that human's nature is actually pretty flexible. So there probably is sort of a human nature in the sense of what we revert to without any other pressures. But a distinctive fact about humans is we are culturally pliable. We can change and become different things in different cultural contexts. And the biggest example of that, most plausibly, was the switch from foraging to farming.

So as foragers we were more like animals in the sense of just doing what felt natural and that typically worked out okay. And then farming became possible, but only possible if humans would just drastically change a lot of their ways of life. And we did. So we became farmers. We stayed in one place instead of drifting around. We had property. We had marriage. We had war. We had trade. We had more inequality and slavery and domination. Disease. It was just a pretty different world. And we were actually pretty different. Humans became substantially different as farmers. And, you know, you could certainly just see that if you ever... You know, see traditional farming communities and compare them to traditional foraging communities. They are just enormously different. Foragers not only don't have much property or marriage, they're very egalitarian. They wander around. They have more variety of places they go and food they eat and they work less hard. They're certainly less religious and they're just really quite different.

So my key idea for explaining the last few centuries is this idea that: as we got rich, the pressures that had made us into farmers weakened. We were made into farmers in substantial part because we were poor and near the edge of survival and people could credibly threaten us that if we didn't follow the farmer norms of our world, we would die. And that actually happened. But as we've gotten rich, we can look at ourselves and say, if we don't follow the farmer norms, so what? We'll do okay. We see all these other people around us and they seem to do okay, even if they don't follow the farmer norms. And so we have... just drifted back more toward forager attitudes and styles because that deep down feels more natural. And this can explain a number of big trends over the last few centuries. So for example, more democracy, less religion, more leisure, more travel, less slavery, less domination, more egalitarian attitudes, less fertility. A number of the most important, largest trends over the last few centuries can be understood as our going back to being more like foragers.

Now, one thing to notice here is that this trend back to being more like foragers is plausibly explained by the absence or weakening of selection pressures. So that means this change is not plausibly adaptive. That is, we haven't changed because this is a better way to be in our new world. We've changed because the world is less disciplining us and forcing us to be any particular way. And this is what feels natural. So it may in fact be maladaptive. That is, we may be suffering in the long term in terms of evolutionary success by becoming more forager-like. Nevertheless, we have this space to do so because we're rich and comfortable and peaceful. And this is what we feel inclined to do.

Tobi: So, if that is the case, what does it mean for the stability of our more traditional farmer-style institutions that have brought us this far as a civilisation and um, yeah.

Robin: Well, so there's been a lot of change in the last few centuries and a key question about that change is which of it has been driven by healthy cultural selection pressures and adaptive processes such that the new behaviours make sense and are actually more useful and adaptive and productive in our new world, and which of these changes are not? Are just changes that are happening because we feel like it and we can't be stopped, at least for a while, but are not going to make our world more healthy and functional, etc. And so a major challenge in analysing the world to try to distinguish these two cases. So one simple way to distinguish them is to think about how local is the variation that's allowed. So think about most technology. Technology is the sort of thing that if you see a new technology, you're typically allowed to switch to it without too many other people complaining about it. And because of that, we have the strong selection pressures for people to adopt the technologies that they think they like. And therefore, plausibly, over time, as we've adopted technologies, those have been adaptive choices. They have been ways that the new world makes more sense when you have these new technologies than without them. Because there are these strong selection pressures. And more generally, if you think about firms in capitalism, businesses, we have a great many firms around the world and they try a great many different corporate cultures inside the company, different attitudes and practices and norms inside companies. And different companies try different approaches and plausibly there's enough different companies facing strong enough selection pressures that over time, the better business practices probably went out.

If we have firms having business practices today that are substantially different than they had three centuries ago, that's probably because these are better business practices. Or because there's enough selection of variation. But if you think about aspects of culture which are sort of our basic values and norms where we face strong conformity pressures to all adopt the same ones, it's less plausible that those are actually going to be adaptive. And therefore, it's plausible that changes are maladaptive. And that's more the problem. Uh, so if you'd like, we can go through, you know, a number of specific examples, but the key issue is to distinguish which kinds of changes seem to have been subject to enough selection pressure and variation to produce healthy cultural evolution and which have not.

Tobi: Please go ahead. Be as expansive as you can.

Robin: From a biological point of view, falling population in times of plenty… peace and plenty, and, you know, low disease is problematic. It's just puzzling. It's plausibly evidence of maladaption. So the most clearly maladaptive trend is falling fertility. And we can identify a number of cultural trends that are causing that. And so those are also candidate maladaptive cultural trends. So for example, we get a lot more education than we used to and education seems to be hindering fertility and plausibly we're just getting too much education. It's the amount we're getting [that] is maladaptive. We, for example, switched from cornerstone marriage norms to capstone marriage norms. Like, when I was young, the idea was to marry young, somebody. You weren't fully formed, they weren't fully formed. You didn't know exactly where you're going to be in the world. And both of you figured that out together. And now the norm is more that you should wait and to figure out who you are, find your place in the world, be secure, then find somebody else who matches your particular place in the world, after they found themselves and figured out who they are and then that's you should marry. So that change also is a big hindrance to fertility.

Another norm that's limiting fertility is that we pay a lot more attention to children now than we did in the past. So it could be that some distance time in the past we were paying too little attention to children, but plausibly now we're paying way too much attention. And the more each parent is supposed to pay a lot of attention to the children, the less likely they are to have more because they think they've kind of run out of time and energy for the children they have. Um. So these are some examples of cultural trends that have been hindering fertility and that are plausibly maladaptive, because they're not only hindering fertility, it's not obvious that they are overall making the world more adaptive.

Tobi: I'll get to some of what you've written on culture drift later. But for now, one of the preoccupations, at least in the domain of what is called development economics or studying economic development generally, is institutions. Largely because it is perhaps major determinants of which policies get adopted by countries and those policies can be the difference between being poor and being rich. Right. You've championed a provocative idea called Futarchy - in which elected officials would define a national welfare metric. I'm a big fan. And prediction market speculators will then decide which policies are most likely to improve that metric. In Futarchy, if the market odds clearly show that a proposed policy will increase expected national welfare, that policy becomes the law. In theory, this could make governments far more informed by leveraging collective expert knowledge and avoid, you know, some of the problems [of] political gridlock or interest-based politics. But I want to put it to you directly. How realistic is Futarchy in practice? Especially if we go outside of markets like the US.

Robin: So, for every policy proposal, there's two very different questions about that proposal. And it's realism. One question is, is anybody ever going to adopt this thing? And as an economist, I have liked many policy proposals over my decades that have not yet been adopted and that many people think are just never going to be adopted. And so they think we're wasting our time and effort if we pursue and elaborate and think through the details of policies that nobody's ever gonna do. And, you know, that's a fair critique and it comes down to what are the chances of it getting adopted and then, you know, finally being tried. A second question is, if we tried it, would it work? That's a very different kind of question in terms of feasibility or realism. And I feel much stronger that that should be addressed. So I'm okay with making proposals that maybe have a low chance of being adopted if I'm pretty sure that if they were adopted, there'd be a good chance of success. But, I mean, another thing to realise is all we need to do when we adopt something is try it for a bit and see if it works. So the main harm of trying something is the short time during which you would have tried it. And then found out it didn't work very well and then quit. Nobody should be proposing making vast changes to society on the basis of relatively speculative things that haven't been tried much. The proposal is to take an idea and then try it out on a small scale. And when it works on a small scale, try it on a bigger scale and it keeps working there, bigger, bigger, until eventually it might be big and be applied everywhere and give us huge gains.

Tobi: So why aren't there more experiments? What is holding up experimenting with this idea on a very small scale, perhaps within companies or local governments? Is it about trust or yeah?

Robin: Yes. So, um, like all my life I've been around economists and other people inventing things that they think should be tried and seeing some of them tried and most of them not.

So first thing is to say is there's a lot of energy in politics. A lot of people really like to be involved in politics, and they really want to argue for this policy or that, or this administration or that, or push for this person to be elected or that. But when it comes to thinking about new institution ideas, there's very little energy. Very few people care at all about that, or they don't want to be bothered to try. So unfortunately, just trying new institutions seems to be low status and not very interesting to most people. Right. And when things do get tried in the world, they tend to be tried because someone high status with a lot of prestige and power in some area endorses an idea. So a major limitation of things getting tried is what are the high status, prestigious people willing to endorse to get tried? Most people are just not interested in trying something unless it gets that sort of endorsement. And people like me aren't powerful, high status people. So that means we have to influence somebody who is more powerful and high status to be interested enough in something to try it in order to get it tried. So the major reason why not enough stuff is tried is because for most people, they don't care very much about trying new things, they're just not eager to. And then we have this bottleneck. They need high status, powerful people to endorse an idea, for trying it in order for it to get tried. And of course, if it doesn't work out well, that may be worse for the reputation. But if it succeeds, it may go better. And that's basically the world we live in.

I would rather people spent less time arguing about politics and more time trying out new institutions. I think the world would just be much better off if we put more energy into trying out new ideas, but just because I wish that were true doesn't make it actually true. Now, you asked about the specific idea of Futarchy a particular governance mechanism, and I can happily report that in the last few years we now have a bunch of experiments, a bunch of people trying it. So I first described the idea over 25 years ago, in roughly 1999, just before then. And for a very long time, many people had heard about these ideas and liked to talk about them and to hear about them, but almost nobody wanted to try them. But now, in the last few years, there are trials, and so far they seem to be relatively successful. But as I said, what we need to do is try things on smaller scales and then work up to bigger scales, etc. until we can get them much more widely adopted. But most of the experiments in the last few years have been crypto-based organisations. There is this thing called a DAO, a distributed autonomous organisation, that people have tried out on crypto where there's some governance mechanism on the blockchain and that drives an organisation's behaviour. Those haven't worked very well, but applying Futarchy recently has had more success in governing these organisations.

There's also been government based experiment that's seemed to have gone well. And now there's a number of other crypto-based organisations that are setting up to do trials and experiments here. So I'm excited that we finally have some trials.

Tobi: I assume you are in touch with some of the people running these experiments.

Robin: Yes. I am officially advisers on many of them.

Tobi: Oh, okay. That's cool. What have you learned from those experiments? And has it led you to refine your vision on how decision markets might work in governance?

Robin: Yes. I have to admit that 25 years ago, I thought through the idea in substantial detail, but there were some details I just didn't get into, and that finally seeing people try them now made me think a little more detail about some of the issues that I had neglected and slopped over before. So I guess I could have always thought about those more, but I didn't feel very motivated to when no one was actually trying it. So there have been some details. I've tried to work out more, and we're going to see how those play out in these small scale experiments. I also hope to do some lab experiments to test these things. So, yes, we're working out some particular details. I mean, I don't know how far you want to go here in this conversation into those details, but they're relatively detailed. But still, there's work to be done.

Tobi: Another subject that's risen in status over the years is, um, the idea of progress and debating progress has also risen in status, I should say, in public discourse. I mean, we have even, uh, people on the left arguing for abundance with the new Ezra Klein and Derek Thompson's book and there's the whole progress studies ecosystem that seems to be growing. Uh, one of the things that makes me laugh while researching the themes I want to cover for this episode is there seems to be either a Robin Hanson blog post or paper for everything. So one of your papers that I loved so much is Patterns of Patronage, where you looked at the 18th century practice of prizes in spurring scientific research and how that was replaced by the grant system. Uh, and you found that the shift wasn't because grants are inherently superior, but rather because the dominant patrons changed, you know, more non-local democratic governments who prefer grants. What does this historic lesson tell us about how the structure of funding can shape the pace and direction of innovation, especially at a time where there seem to be worry that innovation is slowing down.

Robin: Right. So a lot of people I know in economics or even science studies have a strong presumption of progress. That is, whatever changes happen must have been good. And unfortunately, this particular datum and some related ones suggest that's not true. So one of the biggest trends in academia and science in the last few centuries is that academics themselves wrested control of academia from other people who fund it. And that happened first in grants, but then it later happened in tenure and in basically other ways in which academia doesn't have to listen to outsiders as much as it used to. So many centuries ago, say, during the beginning of the Scientific Revolution, there were outsiders who had a lot of influence over science because they were paying the money. So scientists typically didn't all do it themselves on their own wealth. They got money from other people to do science, to do academic things. And those other people had a say. In the past, people initially gave out money more often through prizes than grants, and then they also gave money through sort of just supporting infrastructure, like making a library or funding an expedition, you know, paying for journals.

The funders had a sort of direct influence over the topics and priorities via they paid and so they could dictate, through their paying, some conditions. And what happened? We did have the switch from prizes to grants. And grants are a way in which academics are more in control of the money. You give money to a bunch of grant givers, and the grant givers decide who the money goes to. And then there's no particular accountability of whether those grant receivers actually do anything particular with the money. But in addition to moving from prizes to grants, we also moved to peer review. When Einstein did his papers, for example, those were not peer reviewed. Peer reviewed is something that showed up more mid 20th century. Previously, there were editors of journals who just had a lot of control over those journals and could use their judgment to decide what were good papers or not. And that was another way in which academics were held accountable to outside powers, in this case, journal editors who could disapprove of what they were doing or think things were low quality and make an impact that way. And the third change that happened was tenure. So most professors didn't have tenure long time ago. They might have job security the way most people have. If you've been working somewhere for a while, they don't really want to get rid of you because you have a good working relationship. But the formal idea of tenure is also something that showed up in the 20th century, and that was yet another way in which outsiders couldn't influence the academics and their behaviour and choices as much. The idea is after a certain number of years, you get tenure, then you can't be fired and nobody can complain about what you do.

Now, academics like all these freedoms, the way in which academics have wrested control from the outside of the world and run their own world to their own tastes, they like that. But it's not obvious that we actually have more total intellectual progress as a result of that, I guess in fact, we probably have less. But this was a consequence of academia becoming much more prestigious, and that prestige is what allowed the change. So the first change from prizes to grants happened because the people who were running prizes, who were managing prizes were in fact the main scientific societies of the time. And then the scientists who ran those societies decided to do a coup, basically, and to say, we refuse to accept any money to run prizes anymore. We're only going to accept money to run grants. If you want our name to be on this money you give, you have to give it in the form of grants. And that happened both in the French scientific society and in the British. And they had a successful coup. And so they made people giving the money change their mind about how to give it so that they could have their name on it. And that's a way the academics wrested control of the process from the people who are giving the money, and got more autonomy to give it to their friends. It's not like the money was handed out at random to people who said they wanted to do science. It was a set of insiders who took control over academia and then used it to favour themselves and their friends, and that's now basically how academia works.

Academia still has enormous autonomy from the outside world. People give it money, but then it's basically the most powerful insider academics who decide who gets the money, who gets the jobs, who gets the publications. That all is decided by those insider academics. They, of course, will claim that that's great because they have great taste and they have good judgment, and everybody else should shut up and leave them alone and let them decide. But we can reasonably be skeptical about whether they actually have better taste.

Tobi: Science is still largely funded by large institutions, governments. Uh, Donald Trump's clash with big education might reorder that, but the alternatives that are most likely to rise will also be rival governments who are engaged in geopolitical or technological competition with the US. And I take your point or caveat so to say about progress. But if we want to encourage more positive breakthrough innovation, what alternative funding models do you think needs to be revived?

Robin: I do think prizes just do work better than grants. So I think if we would switch back to prizes, that would be an improvement. With a prize, you basically say what you want to have accomplished, but you don't have to say how they do it or who does it. So anybody who achieves that accomplishment can get the prize money. And that's a more open competitive process than grants, where the grant giver has to decide who has a promising approach and who they believe has a chance of doing it and then they hand out money according to their judgment, to their friends, basically. Prizes would be better, but I actually have a more elaborate solution to academic problems. That's also one that you might think is less likely to be adopted, but that's the trade off we talked about before.

Tobi: Yeah. Yeah. So please tell me.

Robin: Okay. So, I am perhaps most famous for my work on prediction markets - betting markets for things - and that's the basis of the Futarchy governance mechanism we talked about a few minutes ago. And from the very beginning, my first motivation for thinking about prediction markets was how to reform academia. And over the years, I've thought a lot about different ways to do that and I've realised that the initial ideas that I had, and most people have when they come to the topic, just probably aren't going to work. And so initially I just thought if we just had betting markets and most scientific questions, that would be great and then we'd have a better consensus about it. But in fact, most academics just don't want to bet on their stuff. And so there's very little energy and interest in that.

Secondly, I thought, well, we could have betting markets on scientific questions and then you could subsidise those markets as a mechanism of funding so that people who figured out the answer to scientific questions first would then be able to trade in the market and make profit from their trades, and that would be how they would fund their research. But that would require that the people giving money change how they give money, but they don't want to, because the people giving money are in the same equilibrium game as everybody else. They're also just trying to gain prestige by affiliation with impressive people in the same way everybody else in the game is. So the problem is that the game as it's set up encourages people to do things to win personally, but that doesn't encourage the system as a whole to make more intellectual progress. So these approaches don't seem to work.

The approach I think that more plausibly would work relies on the following claim, the assumption that the one thing people will not give up as academics is the claim that the people they most celebrate today as the most prestigious academics are, in fact, the same people that historians looking centuries later back at this era will say were in fact the most important academics. Academics are not willing to say, oh yeah, we're just playing this game and later on none of us will seem very important but, hey, we just like to play this game. They are not willing to say that. They are going to continue to claim that the people that they give the most prestigious jobs, funding, journal article publications to, those people are in fact the people that, when you look back on this era from later on, will in fact have seemed to have been the most important. The people who had the most influence and who were doing the stuff that should have been looked at the most, that should have been paid the most attention to. So that's the thing I'm going to hold with. That's my lever to influence the system.

How am I going to influence the system? Well, simply, I want to create betting markets on what those distant evaluations will be. I want to create a futures market in the reputation of each academic. So centuries later, I want to have panels of historians go back and look at current academics and rank them according to who should have been listened to the most and they can use all their knowledge of the future to know which research programs petered out, which had promise, which led to important, interesting results. They use all of that to go back and say who should have been listened to the most in order to best produce more of the progress that had happened. So now we would have betting markets in those future numbers so that every academic would have some score, some current market price that represented the market consensus - evaluation of their potential to be somebody that the future would say, yeah, that person should have been listened to a lot. And now when academics make choices like hiring someone or publishing them or giving them a grant, we can all compare those choices to these market prices. So when Harvard sociology department hires somebody, we can say, okay, the guy you hired is now ranked 372 out of all the people who might be judged to be as important as the guy you hired. And why did you pick number 372? You had a lot more higher ranked people to pick. And now they'll face a choice. They can either make their choices more consistent with the market so there's less of an embarrassing question to ask. Or they can deny the market knows anything they can say: that's stupid market, why would you listen to that? We're the Harvard sociology department. We know better. But then you could say, well, how come you aren't betting in these markets if you know better? And they should be a little embarrassed not to be betting in the markets if they know better. And so that embarrassment they're not wanting to be too obviously differing from the market estimates would be a pressure that would make these market prices influential and therefore, academic choices would move more toward the choices that are actually the better choices about who should be getting funding and attention and resources and jobs because they, in fact, do have the better shot at having important long term influence.

Tobi: Hmm. That's deep.

Robin: That's that's my idea.

Tobi: That's deep. I'm still struggling to wrap my head around that. I mean, we are still in governance territory here. I want to speak a bit about the rise of philanthropic organisations who also do some funding and in some cases fund science, again, basically through grants. But generally philanthropy has risen in status. Most prominently, the Effective Altruism movement has done quite a lot to influence this. Another one of your papers, Showing That You Care, where you argue that much of what looked like altruistic policy say, paternalistic health regulation or support for universal health insurance may actually be driven by an urge to help and signal loyalty to our allies and shaped by our ancestral environment. We genuinely care about others, but we subconsciously choose ways of caring that also broadcast our good intentions to observers. You argue that this perspective can explain puzzles like why medical spending often have very low marginal health benefits, because the social role might be more about showing concern than improving health. So do you think organisations like Effective Altruism are trying to truly break free of our primitive signalling drives to do good more rationally? Or do you suspect that status or image and these things you've written about still quietly shape a lot of these newer, quote and unquote, altruistic efforts?

Robin: So I'm not the first person by a long shot to have noticed that humans often don't live up to their ideals. People talk a good talk about their grand goals and their grand ideals, and they talk as if they are trying to achieve their grand ideals, and they often don't. Their behaviour deviates from that. Now, the fact that many people have observed that then induces people often to say, well, we're different. We, this organisation over here is actually really going to be idealistic. So if many religious organisations don't achieve religious ideals but we're different, we're the religion that's actually going to do it. There are charities that aren't actually very effective at charity, and people notice that. Then another charity shows up and says, ah, but we're going to be better. And this is just a common feature of human behaviour forever. Like, a government that says we are here as a government for the people. Often people notice, well, you're not actually working so much for these people. Then another government shows up for another political party, says, hey, we're going to actually, we're actually going to help the people, right? So this just keeps going on and on. Why? Because when somebody claims that they're actually going to do better, the question is how carefully does anybody look to see if they do do better? Often it's enough just to make the claim. It's enough to make the claim that your political party actually cares more about the country and the people and whatever else it is. And the other political party, they're corrupt, they don't care. But it's often enough for your supporters to just make the claim. And then people are willing to assume you must be right because you're one of them, you're a friend of theirs, you think like them, you feel like them. You live in the same places they do. They're going to assume, okay, yeah, you're like me. So you must actually want to live up to your ideals. Not like those other hypocrites out there. But you can see that if we're allowed to just make the claim that we're better without anybody checking on it for better. We're not actually going to be better, right?

The way in which people will actually be pushed to live up to their ideals is if somebody's checking, looking at the difference between their actions and their ideals, right? That's the only way that people are actually going to be pushed more to live up to their ideals is to to be checked, to be on it. So, um, that's of course, the key question is who does the checking? Now, of course, some people will say, we'll do the checking. Trust us. Like, you know, there are people out there who say, we will tell you what politicians to vote for. Just trust us. And we'll send you a list of who to vote for. And then you'll vote for those people, and then everything will be better because we're doing the checking. You don't need to check us. We're just going to check for you. But of course, if you don't check them, they'll just claim they're doing better but not actually do better. And then it won't be any better, right? So this is always the problem: is can you make a process that people can inspect to see that you're actually doing better?

In the early days of Effective Altruism, one of the main mechanisms was evaluation of charities. So one of the new things was we're going to have an independent organisation that evaluates charities and their claims and sees how they're doing. So we have such things in other parts of the world. We have, like, Consumer Reports; does evaluations of business products. We have bond rating agencies that rate the risk of bonds. In many other parts of the world, our world, we have independent organisations that are offering independent evaluations of things. And often you can tell by their independence and their efforts that they are actually telling you more information than you were going to get from these sources themselves about the quality of their product. So I think that is, in fact, a great way to make people offer higher quality products of all sort, is to have independent evaluators, who are not funded by or getting kickbacks from the people they're evaluating. You're paying them separately to do the evaluation, and then they, in fact, tell you different ratings, and they show you the process they use to do that rating so that you can see they didn't just making up numbers. They are, in fact, looking at something real in order to evaluate the things they're rating. So I thought it was very promising in the early days of Effective Altruism that this was a solution. They're saying, well, how do you know which charities to trust? They're all claiming to be great. We're going to offer you an independent evaluation, and we're going to show you how we're doing it. We're going to show you the process and the formulas we use to evaluate these charities, so that you can trust our independent evaluation. And one of the first big organisations like that was called GiveWell. And they got a lot of attention, and a lot of people donated money to them so that they could do evaluations to help the rest of us decide which charities to go to.

And I still think that's a great idea. Unfortunately, the field or the community of Effective Altruism, they decided after a while that that wasn't such a good idea because that was too indirect. They wanted to just have the money and just do the stuff they thought was good. So now most Effective Altruism organisations, they're just getting money from someone and doing the things they think are good and they're not trying to, like, have independent evaluations of what they're doing in order to prove that it's good. You're just supposed to trust them. Hey, we have a good heart, so just trust us. We're doing the right thing. Which means they're just in the same boat as all the other charities everywhere.

Tobi: Especially with the whole FTX thing and some of the negative publicity that Effective Altruism got in the last two years, it makes me think about signalling generally. Do you think that it would be more efficient for us to just lean into it. I mean, kind of like education and Bryan Caplan's argument, even if that were true, that most of education is signalling, education is not a net negative and I don't see it going away anytime soon. So regarding altruism, charity and all the other feel good things that we do, should we just lean into it? I mean, should policymakers just create ways where we can visibly demonstrate how we care rather than trying to optimise for what is rational or not?

Robin: So it comes down to what it is you're showing off when you're showing off. See, if you're trying to signal that you were effective, then you'd have to show credible evidence that you were effective, and then people wouldn't actually support you or praise you until you were actually effective. The problem is, in a lot of these domains, we're satisfied with signals of other things. So for example, in medicine, we're satisfied with signals that show somebody they care about you, even if they're not very effective in how they care. With education, we're satisfied with signals that show somebody is smart and conscientious, even if they didn't learn anything at school and in charity, we're often satisfied with showing that somebody sacrificed and therefore cares without actually seeing how effective their efforts are. So it's not about whether there's signalling going on, it's what you're signalling and which signals you will accept as a sufficient signal. If all you want to know is that somebody cares enough to sacrifice and to, say, give up some money to donate it to a charitable cause, if you were willing to say you're a good person because you sacrificed and we don't care where the money went or what happened to it, all we care is to see that you sacrificed it. Then you'll continue to have people throwing money at random things that don't work because nobody cares about that. It's only if we care about how effective your donations were, as a reading of you, that we will then want you to show us how effective your donations were in order to judge you. But that requires that we change what we care about in you. And so that's unfortunately a problem. So a lot of these signalling games are driven by the things that people actually care about. And they would go better if people cared about other things. But of course that's the problem. People care about what they care about.

Tobi: Mm-Hmm. Let's drift back to culture drift, which is your... except I'm not current anymore, which is your latest big idea. And you touched on it earlier. Uh, basically, culture is evolving, you argue, I should say, in potentially maladaptive directions. And you talked about fertility, especially in wealthy societies where they are not even coming close to replacement rates. I mean, future generations might look back with amazement at how we squandered our abundance by failing to reproduce. How serious is this cultural drift, in your view? I should ask first.

Robin: The one thing that most distinguishes humans from all the other animals is that we have been driven by cultural evolution. We have some other distinctions, like, you know, we stand on two feet and we have bare skin instead of fur. But those other distinctions are just not remotely as important as this one key distinction that we are driven by cultural evolution, that's our superpower. So if we broke it, that's really important. If we broke our superpower, it means we're not going to be super very long unless we fix our superpower. Our superness is going to fade away and decay into collapse and death and destruction until we fix it. It might be a slow decay that takes centuries, but still, this is our superpower. So it's hard to exaggerate just how important this is. An analogy I'd like to have you imagine is driving down a road in a car, say, there's a control problem in controlling the car to stay on the road, and there's a bunch of control parameters of the process you use to control the car that need to be in the right sort of a range to make this feasible. So if the car is going slowly, you can see the road really clearly. The road only changes slowly. You're awake. You're not drunk. You can clearly see the road. You can think clearly and make a decision to turn the wheel. And the wheels just strongly connected to the car tires themselves to move the car. The car driving process will work. Those parameters are in the range that you can effectively see the road turn a little, you think about it a bit, you turn your steering wheel a little, the tires turn a little. The car stays on the road. You don't go off the road.

But if we turn these parameters to the other extreme, if you're driving really fast, the road is changing really fast. You can hardly see the road. It's really dark and rainy. The wheel is floppy. Your mind is slow. The tires are wobbly. You can see that as these parameters get bad enough, you're not going to stay on the road. You're just going to drift off the road. And depending on what's next to the road, you might well crash. Our superpower, this cultural evolution is a system that has parameters like this. It's a system where basically there's a set of points in a space, and somewhere in the space is the adaptive region and the points in the adaptive regions, they grow and they multiply and they do well. And points away from this adaptive region: they decay, they die, they disappear. And this adaptive region moves around in the space. And so if you have enough points near the adaptive region, then even if the adaptive region moves, some of the points will be there. And so those points can grow. And the cloud of points can be a lot of points near that adaptive region, even with the region moving around, or even if these points actually wiggle around randomly and drift around. Still, if there's enough points strong enough selection pressure of the points near the good region increasing, and the other ones going away, this whole process works, and it's worked for a million years. And 300 years ago, we had basically hundreds of thousands of little peasant cultures in the world, all of which [were] near the edge of survival. They were poor. They had famines, they had wars, they had disease. So if they made bad choices, they would just disappear and be replaced by neighbouring cultures. So we had large variation, strong selection, and the world was changing only slowly, and these cultures were very conservative. They didn't want to change very much. So this system worked. A control system to drive the car of human cultures had worked because the parameters were in the right regime.

But in the last few centuries, we've taken these hundreds of thousands of peasant cultures, and we smash them down into 100 or so national cultures, and then we smash those together into a shared world monoculture, and these cultures that are remaining much fewer of them, they face much weaker selection pressures in terms of disease and war and famine. They basically don't die anymore. And the world they're trying to track is changing much more rapidly. Technology and other changes are making the kinds of things they need to track to be adaptive, changing fast. And in addition, rather than being conservative and being reluctant to change our cultures, we've become eager to change our cultures. Cultural activists have become our biggest heroes, and we love to celebrate the people who tried to cause cultural change, even if it wasn't obviously adaptive. That's not an important feature of the cultural activists we celebrate. So these are four different parameters that are all gone wrong in the last 300 years. And plausibly what that means is this cloud of cultures that we have remaining is not tracking the adaptive region of cultural space. It's drifting away. And that means our cultures are becoming maladaptive. That's the key problem.

Now, I want to be clear. There's two levels of culture. There's the kind of things that can vary individually easier, as we talked about before. And those things go fine. So an analogy is biological species. In biology you can have habitats that are fragmented with lots of little species or habitats that are big and integrated with a few big species. In the first sort of place, evolution within species doesn't work as well because each species has fewer members, but evolution of the species of the features that species share, that does much better. In the big habitat place, the evolution in species does better because each species is larger. So in our world today, within cultures, the things that can change within cultures, because we have a few big cultures, that's going great. We have better evolution of business practices and technologies and all sorts of things that can vary within cultures. The thing we have less of is evolution of the things that define our cultures, that it's hard to vary within a culture like, marriage norms, education norms, medicine norms, things about war, things about community, things about patriotism, a lot of cultural attitudes that are hard to vary within a culture because you'll be punished if you deviate, those are the things that we have very little variation of now and those are plausibly drifting into maladaption.

Tobi: So I guess the big puzzle for me, though the culture drift argument is very Robin Hanson, Hansonian in that sense. You're not the only one talking about fertility. It's become quite a huge topic in the West.

Robin: Yes.

Tobi: And again, some other people, scholars, public intellectuals, whatever, also give cultural diagnosis, uh, the collapse of religion, or marriage, you know, and things like that. But my big puzzle or question is, can cultural trends really be reversed? What is the solution really?

Robin: So first, I think I mentioned this before, but when you're talking about cultural trends and which directions do we want culture to go? That's actually the most prestigious people we have in our intellectual world. The people we most celebrate and give the most attention to and love the most are the people who comment on cultural directions, what's happening and which directions they favour. So there's no lack of discussion of cultural evolution from the inside, which direction do we want to push for, for culture to change? Cultural activism is really popular. What's rare is to stand outside the system of culture and to see it as a system, and to think about how that system could go wrong even when the individuals in it are doing things they feel are good. That's the hard part to see. And that's plausibly what we need to think more about, because that's where the system’s going wrong. We're going wrong in just having a system like this where we make such huge changes and we have such little variation and weak selection pressures. So many people do see fertility as a thing happening, but whether they think it's a problem we're solving depends on how they frame it culturally. Many people say, oh, look, it's not such a bad thing if population declines, we have a huge world. We could, you know, go on for thousands of years before we went extinct, that probably won't happen. So, you know, what's to worry about? We'll have less environmental impact. We'll be happier. You know, just let the population decline. Because those people see the alternative policies that might make population no longer decline as much as their cultural enemies. That is, they're pushing for culture to go one way, and they see the people who are opposing their pushes on the other side, and they think those people will win more if we let, you know, this fertility argument go forward. And then the more people do about fertility then those people will win. For example, religious people tend to be more fertile. So one way to promote fertility is promote religion. And a lot of people just hate the idea of promoting religion. They exactly want to stop that. Or say gender equality. Gender equality has, in fact, been something that's been reducing fertility, and many people are so eager to promote gender equality that they don't want to risk at all any sort of weakening of that by acknowledging that fertility might be a problem.

Tobi: One last area I would like to touch on is your personal intellectual journey. You studied physics, computer science, and then you transition into economics, and you've become known for exploring big, really, really big ideas. What were the pivotal influences or moments in your life that set you on this, I would say, unique intellectual journey?

Robin: Well, uh, first of all, I just became someone who wanted to be an intellectual. That is when I first came to college, I was inspired by some lecturers who made this grand vision of some people who figure things out that are important, and I wanted to be one of those people who figured out important things. Now, that doesn't make me especially unique, lots of people bought into that, but that was my vision. And for many people, like wanting to be a professor and academic is about being respected person who has a nice office and who gets to give lectures and other people invite to give keynote addresses and they're distinguished and they're thought highly of. And for that sort of a future, then they just should like follow the standard path and do what they're told and get the proper credentials. And then they are successful in their eyes because they have become a respected person who's doing respected things. But that wasn't my vision because I was sold on being a person who figures important things out. And that was kind of random, I guess, I could have been sold on the other vision, but because I was sold on the vision of figuring important things out, it wasn't enough for me to just collect some credentials and, you know, be thought of as a respectful person. I wanted to figure important things out, so I relatively early on tried to dig into everything that I could to ask - what's the fundamental here? What's the deeper underlying thing here? What are the key questions? How can we figure them out? So, that's the first part of I guess my life is to pick that as my framing.

So everybody in some sense, early in life picks their image of status, their ideal, and they pursue that. And they often assume everybody else must have the same ideal. But they don't. And people often don't realise the choice they're making about what to set up as their ideal. But that's where I fell into. I fell into this ideal. I'm going to be the person who figures out big, important things. That was the game to me. That was the whole point of everything. And then through school, I kept thinking about things and figuring things out. And it was a long time before I could realise, oh, I should, like, have a career plan or something. I was just so focused on reading things and thinking about them and figuring them out, and then taking whatever excuse I could do that, that I didn't actually realise, oh, well, if I want to be one of these big thinking and important people, I'll have to, like, get a job somewhere and I'll have to have credentials to support that. And so it took a long time for me to realise that I should have a plan like that.

And basically, I'd been out of school and I had some things I thought were interesting ideas, including prediction markets. And then I thought, okay, how am I going to do this? Oh, I need to go back to school and get a degree. And at that point I was more focused on, okay, I'm going to have to make compromises here. I can't just study what I'm interested in. I'm going to have to also accommodate what other people are interested in in order for me to get credentials and, you know, institutional backing so that I could continue in this world. And so I returned to school at an old age of 34 to start my PhD. And I had at that point two kids aged zero and two. So it was a big disruption to my family to go back to school and get my PhD. And then for the duration of my PhD and then a postdoc and the first few years of a tenure track position, I did lots of fun stuff on the side, which I thought was interesting, but then I constrained my main intellectual activity to be close enough to what the establishment wants, that I could, you know, get a PhD, get a tenure track job, and eventually get tenure. And then when I finally got tenure, I could go wild again, ignoring what everybody else wanted and just doing what I thought was interesting and important.

Tobi: You've explored brilliant, uh, sometimes even eccentric ideas from prediction markets to ancestral psychology to far future brain emulations. You've also had to play the contrarian at times in academia and public discourse. How have you handled scepticism or controversy around your ideas? Have you ever had a moment of doubt or personal crisis, so to speak?

Robin: See how I frame this? I see the whole point of everything here as figuring out big, important things. And it's what we're trying to find is news. You're trying to find things that are surprising. So a lot of academic work actually tries to show that the usual conventional view is exactly right. And people find that as prestigious and important, and they give people, you know, big accolades for that. But it's not really news if you thought this was true and then you check and it's still true. To me, it's the thing you're looking for, is the news. Things that you didn't expect to see that are surprising. And so you should expect good work to be surprising, i.e. a priori unexpected. That is, people should not believe you until they see your arguments for your conclusions. That's what news and surprising stuff is, right? So I'm completely happy with having news, having results that people, upon hearing the claims I'm making saying that can't be right. That's what news is. Unfortunately, many people, upon hearing what you say and thinking, that can't be right. That's where they stop. And they're not willing to actually listen to the arguments and evidence you've collected for this surprising view. If we're going to be looking for surprises, you've got to be ready to hear something that's claimed to be a surprise and then consider if it actually is a surprise. Okay.

And then there's a separate effect, which is basically I've been focused on looking for the most important neglected problems where I can find an angle. And it turns out humans just have a bunch of blind spots. And so there are just more important neglected things near the blind spots than elsewhere. So that made me interested in those blind spots. That is, wherever it is that other people have been neglecting stuff that's important that I could make progress on then, yeah, I want to go there. So, for example, I was initially in physics and computer science, and I would say in those areas, if you find something that's unusual, there's usually been a lot of other people near there looking for the same sort of stuff. And so it's hard to find a big advance in computer science or physics exactly because so many people have been looking around for advances.

Tobi: Yeah.

Robin: You're competing with all these other people who would love to find a new, important neglected thing because the world is really eager to find all those things. The world's really eager for new physical materials or physical processes, or new computer science algorithms or devices. The world loves that stuff, and they're eager for it. They pay a lot for it. So there's a lot of people eagerly looking for all that stuff.

And then I started to dabble in social science, and it seemed to me that in social science, it was much easier to come up with surprising results. And so that's why I switched into social science. Wow. Now, I thought, I must be really good at this, but not so much. The problem is, in social science, people just have a bunch of opinions about what they want to believe about the social world, and they're not so open to hearing that they're wrong. Humans don't actually fundamentally care about computer science or physics. They have induced interest in those areas because they're practically useful, but they don't fundamentally care. So there's not so much resistance to a new idea in those areas because we don't really care so much about which particular theories we believe or things like that, we more care about what we can do with them. But in social science, people care about particular opinions on medicine or education or politics, etc. And because they have pre-existing opinions that they are working to support, that's an obstacle to them thinking clearly, which means that they often leave important neglected problems unattended because of those obstacles.

So I went, okay, great. There are these important and neglected questions, but that's also an obstacle to convincing people that you found an answer to something. That is, you can go past the obstacles that block other people because they have pre-existing opinions. You can think about it fresh. You can figure out new answers. You can get evidence for those answers and arguments. You can bring them back to people, and then they just won't listen. That's what I didn't realise about social science is the reason why it's so much easier to find new, important stuff there is because the world's not listening. The world's not so eager to get that stuff. And so, um, you know, by the time I figured that out, it's kind of too late. I'd made my commitment to social science. I'm still happy that I'm able to make a lot of surprising, important insights and advances. But I see the problem here is that the reason that it's so easy is other people just aren't trying that so much. There's not so much demand for that, because if you find something, the world shrugs and goes, nah, we don't believe you.

Tobi: Final question for you. Um, this is a bit of a tradition on the podcast. What's the one idea that you would like to see gain more status, influence, and be more widely held, adopted even? You're not allowed to say culture adrift, by the way...[Laughs]

Robin: So can I say Futarchy? Look, if my intellectual strategy is to find important, neglected things, I'm likely to think that the things I found are in fact important and neglected. If you ask me, what are the important neglected things I'm going to say? Well, the ones I've been working on, of course, that was my whole point in picking them.

Tobi: Yeah, I agree, I agree, but I mean, can you give me something new?

Robin: I mean, so for example, there are institutional ideas that I didn't invent that I still think have a lot of potential. I think, for example, we could change democracy in big ways to make voters more likely to be informed either through tests or for random selection or other incentives. We could switch from first-past-the-post to proportional representation. We could do Harberger taxes - self-assessed property taxes, that's a better solution to an eminent domain. And so we wouldn't need government to overrule individual property rights if we had Harberger taxes as a way to create large chunk projects. There is a world full of interesting institutional ideas that I didn't invent, that the world should be more eager. So if you want me to generalise it, I think I said this before, which is if we just gave more status and attention to trying out new ideas, we would just make a lot more progress in the world than if we argue more about politics. So people are eager for new ideas and technology in physics or computer science, they're just not very eager for new ideas in institutional arrangements. And they mostly want to fight over who's in control of institutions, not about the structure of institutions. So if we could just try more variations on the structures of institutions, see what works well, then we could just make a lot more progress on institutional change, and that would be a huge value to the world.

Tobi: I've been doing these podcasts for close to six years. I think that's the most meta answer I've gotten on that question.

Robin: I like to be meta.

Tobi: Yeah, that's very Robin. Thank you so much. You're listening to Ideas Untrapped Podcast, and my guest today is Robin Hanson, economics professor and an all-around intellectual giant. Thank you so much.

Robin: Books.

Tobi: Author of two books, actually, The Age of Em and Hidden Elephants in the Human Brain. I'll put up links to his books and some of his most important essays and articles in the show notes. Thank you so much, Robin, for joining me.

Robin: Thank you for talking to me, Tobi.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

Welcome to Ideas Untrapped podcast. In this episode, I speak with economist Sugandha Srivastav about the hidden political economy of electricity in developing countries. Using examples from her study of Pakistan's electricity market, we explored how opaque power purchase agreements, regulatory capture, and poor procurement practices drive high costs and unreliable supply in many developing countries that are in desperate need of energy. Sugandha also shares bold insights on how competitive markets and renewable energy, especially solar, can transform the power sector and deliver affordable electricity for all. Dr Sugandha Srivastav is a Lecturer in Environmental Economics and a Senior Research Associate at the University of Oxford - and a Fellow at Energy for Growth Hub.

Transcript

Tobi: Welcome to Ideas Untrapped. It's nice to have you on the show. I've been looking forward to this, so thank you so much for doing this with me.

Sugandha: Yeah, thanks for having me, Tobi.

Tobi: Yeah. So, why I wanted us to have this conversation was I read your paper on power. By power, I mean electricity, and the corruption, and basically surrounding power purchasing agreements in Pakistan last year. So briefly, can you just summarise what that paper was about, what you found, and what were the general lessons that we can draw from that?

Sugandha: Yeah, sure, so basically about two years ago, we started looking into contracts in the power sector. And as all of your listeners know, electricity is so important to all of our lives. It's very important for businesses. It is hard to overstate how critical electricity is to our lives, so we were just really curious about how is electricity being procured by the government? What are the contracts that underpin this electricity? And, um, can we learn something about how much we are paying for electricity? So we wanted to dig into these power purchase agreements, which is what the contracts are called, but we very quickly realised that they're not disclosed most of the time. So even though this is government money, which is going towards paying for something as basic as electricity. The public has very, very little information on what these contracts are and one of the few places in the world where we could find information about power purchase agreements was Pakistan because they actually released a law which said that tariff agreements have to be disclosed. So what we then did was we spent, many, many months actually downloading all of these agreements and contracts and, in the end, I think it was over 6000 PDFs with very detailed contract information and we put together a database. And that's when we started discovering a lot of very interesting things. It became very obvious to us that some of these contracts seemed extremely generous and that raised some questions on why electricity is being procured with these particularly generous terms and conditions. And whether that means that the electricity sector is enabling transfers from the public to a certain groups of vested interests. So the long and short of it is that we think that these contracts are really important to study, and what we found from our investigative work is that a lot of these contracts are extremely lopsided and, you know, there isn't any competitive procurement, and we know when there isn't competitive procurement, you have no idea whether you're getting value for money, whether you're getting the best product. They're just being solicited bilaterally through these very, very opaque contracts.

Tobi: So, I mean, in that situation, and reading through your paper. After going through all the details and all, did you find out whether that was specific to Pakistan or is there a pattern across poor countries who have no power generally.

Sugandha: It's definitely a pattern. So one of the striking things is that across so many parts of the world electricity is not procured competitively and by competitively I just mean the normal process of firms submitting bids and choosing the least cost bid.

You know, that seems like an obvious way to do this, but that isn't what's happening. To give examples of countries where there are these very opaque power purchase agreements, um, Indonesia has them. Ghana has them. I think Nigeria, by the way, also has them. Mozambique has had them. And till date, we have just had very limited evidence. So what typically happens is that some journalist goes out there and finds a very specific scandal related to this power purchase agreement. And they report that.

So, for example, in Pakistan, journalists have said that the cost of coal being used by these power plants is much more than the market rate. Sometimes it's 50% higher than the market rate. And that's a very strange thing to observe. You know, why aren't power plants using cheaper coal? It turns out that power plants get reimbursed for the cost of coal. So if they say it's more expensive, they get a bigger reimbursement and that is the incentive behind lying. We've also seen that happen in India. So, to answer your question, this type of rent-seeking behaviour in the power sector is not unique to one country. We have seen it across the developing world. And one of the reasons it's there is that there isn't competitive procurement and a symptom is that the price of electricity becomes higher. And it also becomes more unreliable. And in general, you have this situation where public money is not being used efficiently. Unfortunately, yeah, it is a common story.

Tobi: Yeah. to use Nigeria example, not that I want you to respond to that specifically. Um, so in Nigeria, all sides of the bargain in the electricity market is complaining. Uh, the government complained about the fiscal burden of the subsidies. Consumers, citizens complaining because the electricity supply is not stable and the power companies do complain that they are not charging market rates, they are not making money, they are heavily indebted. What is it about the structure of the electricity market that creates this kind of dysfunction?

So, for example, some will argue that power purchase agreements are so structured because electricity is capital incentive and hence you need these lopsided contracts as an incentive for people who are willing to invest that kind of money. So what is it about the structure of that market broadly?

Sugandha: Yeah, so you do need risk reduction to incentivise entry in developing countries. I mean, that is a feature of developing countries. The question is how much risk reduction do you need? So you want enough so that people invest in your electricity sector, but if you give too much, then you'll create a debt crisis. And so there's a sweet spot in the middle where you allow entry into your electricity sector, but you're not going to create a debt crisis which creates havoc for your government.

This is where we think that some of these power contracts have gone too far on the other side. They're creating way too much burden on the government, and to put some numbers here, you know, often like the return on equity that is offered in these contracts, at least in Pakistan, we've seen can be up to 30%. But when you account for the corruption and cheating, so for example, as I mentioned before, power producers can get reimbursed for input costs. So sometimes they lie about their input costs and say that they're higher than in reality because they get reimbursed. So once you factor that in, we've seen some power plants making a return on equity of 83%. Which is much, much higher than the contracted value of 30%. So in that case, what we're documenting is actually explicit cheating.

Now to go back to your question of why this causes dysfunction in the entire power sector? If you think about it, essentially each step of the system is breaking and you know, so the power producers are making super normal profits in some cases. Then the utility, which is in between the power producer and the customers, they often can't charge higher tariffs because they're politically constrained. So they are buying this expensive electricity, but at the same time they can't pass on the higher cost. So they're making a loss. Then because they're making a loss, what they do is that they cut off power. So, because they make a loss per unit, they don't want their total losses to go above a certain threshold. So then their option is to simply switch off the power. That's something called economic load shedding.

So to your listeners, you can have load shedding for many reasons. Sometimes it's because of technical losses. Sometimes it's because you don't have electricity supply. But other times it can be just because your utility turns it off. Because they're not making a profit or in fact they're probably making a loss per unit of power, so they just turn it off. And that's a very under-appreciated reason why electricity is unreliable because it has nothing to do with supply. It has to do with the economics of it. And then you go to the government side because now that the utility is making a loss, eventually this utility has to be bailed out and the government does the bailing out. So then the government fiscally is in a bad position. This is how the entire system starts basically breaking down and the solution is simple. I mean, we need to have a meritocratic electricity system. So if an electricity generator can provide good quality, low cost electricity, they should be able to enter the market, sell and outcompete the old generation. It's as simple as that. And if that's risky, then you can provide risk hedging mechanisms that don't fundamentally distort the market the way they are doing now. Because right now it's a broken market, which is happening over and over again across the world.

Tobi: Yeah, so suppose I'm a developing country that is democratic. And I happen to inherit these contracts, uh, as problematic as they are. We also know that they are also notoriously long term. And sometimes the efficient or should I say fiscally responsible thing to do is to cancel some of these contracts. But again, as a poor country, you can bear at the reputational costs and economic costs for that. You're viewed as unreliable, there's no private property protection and not investment friendly. So how do you deal with this dilemma of handling inefficient corrupt contracts that are also very, very expensive?

Sugandha: Yeah, I'm gonna give a couple of examples. So, for example, In Indonesia, one of the very first independent power producers was called Python. And it emerged through really good investigative work that this independent power producer had such a generous contract and they were overcharging for electricity. And then it turned out that they were connected to the president of the country. They were connected to Suharto. And so what happened was that this actually went to court. Because there was all this evidence that emerged and because it was very clear that this was a case of corruption and using the electricity sector to benefit people in political office. One route is to use the judicial system and to go to court and say: these power purchase agreements are supporting incumbents or they're supporting politically connected individuals that they haven't been negotiated on a fair basis Because part of the legal system is to enshrine these protections and part of contract law is to ensure that a contract is fair and is a fair value to both sides.

So that is one option, you know, where you find very clear evidence of corruption and rent-seeking and the misuse of public funds to benefit certain interest groups you can use the judicial system. Now there's another side to it. If you don't find evidence of explicit corruption, but you're just worried about the fact that this contract is thirty years long, there was no competitive procurement, the tariff is three times the market rate for electricity, but you can't point to any specific corruption, it just seems like they signed a bad contract. In that case, it might call for renegotiation. So you get both parties on the table and you see what you can renegotiate because one of the other principles of contract law is if you're going to sign things that will last for thirty years, then reality might evolve, right? There could be very fundamental changes. And another principle of contract law is renegotiation - the ability to kind of meet and see what you can renegotiate.

So for example, Pakistan had a very, very big round of renegotiations. And one of the elements that they renegotiated was payment in U.S. dollar. So many IPPs were getting paid in U.S. dollar. But of course, Pakistan was collecting its electricity bills in rupees. And whenever there was an exchange rate issue, sometimes the price of electricity could double or triple because the rupee depreciated relative to the dollar. So the simple fix, they said, the government said, look: this is crippling our economy, this is putting too much pressure on our foreign exchange reserves, can you come to the table? Can we have a conversation and can we change these contracts from US dollars to rupees? And a bunch of independent power producers agreed, right? They could see that the country was in a very debt distressed state and that there was a lot of pressure on foreign exchange reserves and so they agreed.

And the good thing about a structured renegotiation process is that it doesn't decline your credit rating because in this case you have consulted with the other party. You have brought them to the table. You've talked it out. Now, that's assuming that they're willing to renegotiate. There can always be a situation where you think the contract is very lopsided, you think you're paying too much for electricity, and when you try to bring them to renegotiate, they decline. So now to give you an example of that situation, that is all the Chinese contracts in Pakistan. So in 2015, China built eight gigawatts of coal in Pakistan. This is now providing some of the most expensive electricity in the country. The coal plants are only used 20% of the time, which for a coal plant, if you don't use it 75% of the time, you're in big trouble. Because it is a high capex investment. You need the utilization rate to recover costs. But in this case, the Chinese coal plants get a fixed payment on a monthly basis, even if they're not used at all. These are called capacity payments, which are very common in power purchase agreements. So it means that in an ordinary situation, they would have gone out of business, but because of the generosity of the power purchase agreement, they're not going out of business. And these Chinese power contracts account for one-fifth of total Pakistani power sector debt, so there are really key piece of the equation when it comes to fixing that. Now this is a very tricky domain right because if you don't find outright corruption, you know, you can't litigate. You try to call them to the table, they refuse to renegotiate. And you're stuck. And it's a huge, huge, huge part of your debt.

This is where I think the international system needs to restructure, because this is when you have a really systemic issue and it goes like this: Pakistan gets bailed out by the right? It's on its fifth IMF bailout package. An investor from China can come and say we can write whatever contract we want and Pakistan will sign and ultimately the debt will be repaid by the IMF through the IMF bailout package. That creates a moral hazard. Because the investor ultimately knows that there's the IMF backstop. So one option is you take this to the international court of arbitration and Pakistan says we have to get out of these contracts. They're not fair. They don't reflect good value. The International Court of Arbitration hasn't been functioning well at all because there's something called the Energy Charter Treaty, and it is very biased in favour of power generators. And there's been a lot of criticism in the academic community about how the Energy Charter Treaty is being misused to prolong the lifetime of fossil fuels that are uneconomic. You know, if we had a normal market where you just have meritocracy, these assets would have been out of the system. so that's where I think we need structural change. And the final point I will say is going forward, looking into the future, developing countries have to do a couple of things. They absolutely, 100%, need to procure power competitively. You know, if there isn't an auction, a sort of beauty contest to see which power plants reflect the best value of money, citizens should ask questions because then you're always wondering, are you giving this contract to your cousin, to a friend, to, you know, I mean, there has to be competitive procurement. By the way, both in letter and in implementation, many of these countries have competitive procurement laws, but they don't follow them in practice.

And I think the second point is actually introduce a market for electricity, because even after the procurement stage, power producers should always feel the pressure. To deliver low cost energy. And that is what the market is for. The market creates the incentive to do that. Whereas if you just have long term contracts, they can sit back in their chair and say, ok, we won the first round, now we're here for thirty years, no one can kick us out. And that's not the right incentive. The incentive should always be that if we don't deliver efficiently, we can be out. You need that incentive. Otherwise, you won't have good quality energy.

Tobi: So, two-part questions, maybe I'll take them one after the other. First one is that there seemed to be some regulatory capture going on because I recall the last privatisation round that Nigeria did in 2013. It was not competitive. It was opaque. And of course we ended up with a mess and a lot of those power companies and contracts and assets ended up with government cronies. So, in terms of regulatory capture, what really can be done and is it unique to the electricity market or it is usually reflective of the general institutional and governance environment?

Sugandha: Yeah, I love that question so much because if I back up and give some context. Um, you know, in the 1990s, the Washington consensus was the rage, you know, everyone was like privatise, privatise, privatise. This will make you more efficient. That was the main recommendation coming out of Washington. And that's why a lot of developing countries started this whole endeavour of bringing private sector investment. But here's the thing. Privatisation only works if it has its key partner, and its key partner is governance reforms, because if you don't have governance reforms, then the privatisation can be misused and abused in the ways you just described. It can result in regulatory capture. And this can be across many sectors of the economy, right? It can be procurement related to construction. It can be related to sourcing materials. It can be related to sourcing electricity. But essentially, whatever type of procurement there is can be massively misused. And so the issue that happens for a lot of developing countries in the nineties, you know, for Asia, a lot of this privatisation of electricity really kicked off in the early nineties. I know for some parts, um, I'm not sure when it happened for Nigeria. What was the year you said?

Tobi: 2013.

Sugandha: So, so for a lot of Sub-Saharan African countries, it happened a decade, sort of a decade and a decade and a half later. Um, but, the key thing is you need these governance reforms and by that I mean you need to have a protocol of transparency. You need to have a protocol of competitive procurement and establish a clear rules-based system that has to be followed. And you also need to have monitoring and enforcement because, of course, things will still go wrong, but there should be fines, penalties, potentially jail terms associated with any type of misconduct and fraudulent activity. So those three pieces are so critical because without those, you can absolutely have the regulatory capture. And that is the other side of the story, right? Some of these contracts, when I looked at them in Pakistan's case, when they are signed in the 90s, any economist looking at that could actually say, oh, my God, if we honour this contract for the next thirty years, there is a risk this will cause massive pressure on foreign exchange reserves. There is a risk that this will lead to a debt crisis. And that would have been the time to turn back and say to the IPP, no, no, no. Let's sit down again at this table. Let's renegotiate, some of these terms need to be softer. Right. But one of the reasons that typically isn't done is because there is a regulatory capture. So I think that those norms of transparency, the rules-based system, the auctions and then the monitoring and enforcement, those are such critical aspects of institutional capacity and they go hand in hand with privatisation. They're compliments. You can't just do one without the other.

Tobi: So the second part of that question, uh, speaking on the electricity market specifically, so if you have to have private sector participation which is a position that most developing countries have found themselves. What are the core principles that should guide the relationship between, say, state-owned utilities and private power producers to ensure a balance between investment security and public interest protection.

Sugandha: Yeah, absolutely. Well, one of the key principles is don't just copy and paste old contracts. I mean, you'll be surprised, but some of these contracts do not change much. And in fact, You know, there's no reason why a contract that had to be very generous in the 90s looks exactly the same ten years later, because in that time there's obviously been development, there's been de-risking, etc. So one thing is really to treat everything on a sort of case by case basis to do a proper negotiation and not to just copy paste and this I think, you know, it sounds so simple and it sounds so intuitive, but when we looked at these contracts, what ends up happening is just the opposite. For example, if you're an independent power producer and I give you dollar indexation, then everyone who comes after you asks for it too. And I basically keep writing the same contract over and over again, even though the macroeconomic situation in the future may not warrant dollar indexation. So I think that's really important. The other structural change, which is something that you start seeing in advanced markets, is to have a place where you can actually bargain for power purchase agreements via a platform. So the UK has a platform for power purchase agreements. Uh, you know, the UK doesn't have a state owned utility. It has many, many different retailers. It has a retail competition, but what happens in this is that the independent power producer can suggest its contract terms and then the utility on the other side can look at this and it can look at other options of other independent power producers that suggest their own contract terms. And in this case you know as the independent power producer that if you ask too much, then someone else will win out over you and will get the contract. So it creates this incentive to basically discover the optimal contract just so that it's enough to cover your costs, it's enough to cover the risk of entering and the risk of participating in the electricity sector, but it doesn't result in super normal profits. And I think that's a really clever design.

Um, you know, one of my colleagues at Energy for Growth Hub says, why aren't power purchase agreements like mortgage agreements? You know, they should be very competitive. It should be very transparent. There should be a rules-based system. The information should be all out there. And we know mortgage agreements change over time depending on the economic situation, why are PPAs shrouded in secrecy, you know, this should be as standard as your typical mortgage contract. And I agree with that.

Tobi: So I'll ask you a question that I'm pretty certain that everybody that's gonna listen to this episode is dying to find out. To sort of like set the scene for that question, if you ask any power producer in Nigeria, for example, why electricity is unstable, it's always about tariff. You know, there seem to be no ceiling on tariffs. It's always tariff, tariff, tariff. We need to charge market reflective tariffs. It's why you don't have power. And it's a source of constant tension because the government then has to subsidise, you know, keeping an eye on energy costs. I mean, the cost of living crisis that the country is currently going through is mainly due to a surge in the price of energy. So what is the right approach to tariffs and pricing electricity generally? And can you give us a formula that you economists use to determine the market rate for electricity? Because like you said in your earlier answer, some of these contracts and the actual economics of it are above market rate and yet there's no electricity. So how do you determine the actual market rate for electricity?

Sugandha: Well, basically, if it becomes a very structured market, the goalpost, like, where Nigeria would want to get you is a situation where, for example, every day, you have a bunch of power generators line up and submit bids. Okay. And one of them says, okay, it's going to cost twelve cents per kilowatt hour for me to give you power. Another one will say, okay, I can do it for ten cents. Another one will say, oh, I can do it for two cents. By the way, the two cents will be the solar power, right? Because solar power is cheapest form of electricity because there is no fuel, right? So in terms of submitting your marginal cost, the marginal cost is zero because sunshine is free. Whereas for other things, the marginal cost of gas, et cetera, there's a fuel that you need to combust. So it typically is higher. And then on the supply side, the utility will check, okay, what is going to be the demand in Nigeria today? You know, is it a very hot day? Is everyone going to turn on their air conditioners? And they will basically move up those bids. So they'll start with the cheapest ones and they'll say, okay, okay, you know, you who said you can do it for two cents per kilowatt hour we'll get all of your electricity first. If that's enough to meet demand, good, you're done. But if it's not, then you'll go to the one who can do it for five cents per kilowatt hour. If that's not enough, then you'll go up to the one that does ten cents per kilowatt hour. And in the end, the price that people pay is a weighted average of all of those different generation costs. But remember in the system which repeats, let's say, every day on a daily basis, you work your way upwards towards the most expensive. So you start with the cheapest and then you work towards the top. And sometimes if you have something super expensive that is… you know, this is called the merit order when you rank things from cheapest to most expensive in the electricity system. If you have something like a gas generator that really, really cannot compete because it's offering very expensive gas, then ultimately that will get pushed out of the system because it's consistently the most expensive. Right? Because you order things.

Now this is the opposite of what's happening in power purchase agreements. In power purchase agreements, the price is fixed for thirty years and you're locked in. It's very, very different. So, when people say that electricity is super expensive and I do know enough about Nigeria to know it's very sunny, but there's really not enough solar being installed at the utility scale level. And let's be clear, right, I know there's domestic reasons because there's indigenous resources in Nigeria, but when we consider this kind of merit order ranking, solar can often put a lot of downward pressure on prices. And that's just because of the very, very intuitive reason that with solar, the cost is just about building the solar farm. But once you have paid that, sunshine as a fuel source, quote unquote, as a fuel source is free. It's a God given fuel. Right. And so that means that it is always amongst the most competitive in the merit order and then it puts downward pressure on prices.

I can give you the numbers from India. So India has a lot of domestic coal, you know, it's one of the biggest, it's the second biggest coal combusting country in the entire world after China. And guess what solar in India is three times cheaper than the coal. But the solar in India cannot generate as much as it should be. So India is installing a lot of solar, but if it wasn't for the power purchase agreements, it would be even faster and even bigger in solar because If we had this proper system of the merit order, which covered the entire Indian electricity market, then solar would be beating fossil fuels all the time. The reason the fossil fuels are not being beaten is because they're kind of hiding under their power purchase agreements and they don't want to let go of their power purchase agreements. So, we have a very funny situation in India that even when the utilities like hey it's been twenty-five years, I've been buying your coal, can I please finish my power purchase agreement. The coal generator says, no, no, no, we're going to extend this for another ten years. Right. And these utilities are like, no, please, please let us switch to solar because that's going to reduce costs. Um, so that's my kind of simple answer. So you want a situation which is really driven by plant level economics. It is dynamic and with every day you have this kind of beauty contest. Who can do it for the cheapest? And on the utility side, they're going to work their way up from the cheapest to the most expensive. I think that is, um, yeah, that is where we eventually want to go to.

Obviously, that kind of reform takes time.

Tobi: I mean, speaking of solar, um, in Nigeria, usually when you hear solar or think solar these days, there's really not much happening at scale. It's usually households and solar solutions has almost been stereotyped for rural electrification, which is weird. But you recently published something on Substack about solar in Chile. Tell me what's been happening in the market in Chile, especially on solar and what's the cool thing that we can learn?

Sugandha: Oh, well, um, so Chile had a big problem. So in Chile, um, just for your listeners, you know, Chile is a very skinny, long country. The capital, Santiago, where most people live, is down south. And in the north, you have the Atacama Desert, which is very sunny. It's actually one of the sunniest places in the world. Now, ironically, in Chile and, you know, in the south of the country where most people live, electricity was very expensive. I mean, it cost around $200 per megawatt hour at its highest. These were the types of really severely high prices that were being paid. And it was being generated through coal. Um, there was quite a bit of coal generation. And it was a very odd situation because people kind of just were like, well, there's a desert. There's so much space and it's very, very sunny up there. The problem was there was no way to bring the electricity from the north to the south. There were no power lines that went that way. So the government decided that they're going to invest in a massive power line that will connect the Atacama desert all the way down to cities like Santiago. And the moment the government announced that plan, a lot of private players suddenly started entering into the Atacama Desert and building solar because suddenly they knew they will have a way to sell the electricity to the biggest markets, right? Because before the power line, who cares if you build solar there. There's no way to transport the electrons. So this was super interesting. Suddenly private investment in solar boomed. Now the interesting thing after that is that once the line was completed, and the solar power turned on. And by the way, these are big solar farms. So normally with solar, if you go bigger, you can actually reduce your costs because of economies of scale. These are fairly large [solar farms]. And the moment the solar started generating, you know, your electricity prices went down from a high of $200 per megawatt hour to a low of $20 per megawatt hour. This was basically very, very transformative for the country and many coal power plants went out of business.

Now, the difference in Chile, by the way, is that the power market is competitive. So once a better technology comes on the block, that mechanism that I described before of always prioritising least cost and doing that on a dynamic basis kicked in immediately in Chile. So that's why you saw solar was supplying for all of the daylight hours, right? Solar was winning. Solar was supplying daytime energy. And then at night, yeah, some of these fossil fuels ran at night, but that wasn't enough for them to stick around or for them to make enough of a profit. And so the upshot was that Chile started pivoting to this very interesting mix which became cleaner and cleaner. It was solar. They're doing a bit of batteries now. I think they also have other energy generation sources that help balance. And for the normal person, it has made a big difference to their bills. But the best part is that the cost of building that power line was paid back in eight years because of the savings. The savings were so huge that even though the government had to build this kind of big piece of infrastructure, it was all worth it and eight years is a fairly short amount of time to recover the fixed costs of such a large investment.

So in terms of the takeaways we can learn from this, right, one of them is - there are strategic investments that government can make that can really unlock benefits, and that is something that countries should be doing if there is a place which has lots of solar potential but it's not currently well connected to where people live and where cities are. Building those transmission lines is going to be a critical piece of the puzzle. And then the second is to also fight the narrative that solar doesn't work. I mean, it's a narrative that exists in many places because like any good competition, you kind of want to talk down the other team and you want to kind of play them down and say, no, no, but they actually can't do this. But to be honest, I mean, I don't think we need to believe opinions and narratives, we can just look at the costs and the numbers and then it's a different story. And I think that with Chile, that's what it shows. Like, here's a global south country that reduced electricity prices so significantly because of solar. That's helping firms. It's helping households. And it's a way to combat that narrative with data and statistics, which is why like that. And I have kind of similar stories from India as well, where you really see it has made such a big difference to people's livelihoods. And the bigger picture here is that, look, we care about electricity. We care about electrons. It doesn't matter whether that comes from a lump of coal or from solar, like, the electricity is the same. Ultimately, we want it to be affordable. And so whatever does it in an affordable way, is what we should turn towards and the truth now with the numbers is that that is solar. I mean, it's quite unambiguously solar.

Tobi: I have two more questions for you to go. The first one is that recently, this goes back a few years actually, uh, a lot of developing countries have been pushing back on rich country led climate agenda basically on the reason that it deals developing countries a very poor hand in terms of energy needed for development and prosperity. Some of it I have a problem with. Some of it actually can come up as political signaling and sometimes a way to get generous deals so that some of these leaders can just embezzle money from carbon exchange agreements or whatever. But generally, what do you think? What's your take? Because another problem that I have that makes me uncomfortable is that climate change is indeed a global problem. There's no region of the world that won't be affected and the solutions to it, there's no statute of limitation on its deference. So what do you think? What do you make of all of this?

Sugandha: Yeah, I would say that in some ways the side of climate change that gets the most media attention in popular press is these COP conferences and diplomats and fighting and negotiating and it's like a game of hot potato. It's like, no, I won't do it ,you do it, no and you know, and they just pass around this hot potato. And I think that to me that's a shame because climate change to me is not a diplomatic game. That's the wrong way to frame this. I think it's actually a game of science and technology and engineers and it's not the playground of diplomats and I think the politicisation of it has actually been very, very damaging. Because it's taken something that should have been a technical challenge for innovation and scientists, and they've made a farce and a joke out of it. And I think if we look at this another way, like, if we just reframe it and say: this is the next big industrial revolution. This is the time in human history where we need to pivot towards another mode of production, something that is more efficient, something that utilises renewable resources rather than exhaustible resources, right? Because if you think of fossil fuels, these are very old paradigms, right? The fossil fuel paradigm started with the industrial revolution in Britain, the steam engine. And if you think about it, it's very simple: you dig up something from the ground, you burn it. The burning creates heat. Which boils water, which creates steam, and that steam moves a turbine. It's a very old, basic concept. There's nothing particularly inspiring about it.

But now, look at where we are. We have discovered that actually if the sun shines on certain materials, electrons can jump and that can automatically in a one step process generate electricity that was the discovery of the photovoltaic effect, and now we know how to harness it at scale. And if you look all around us, the entire earth has been using the sun's energy. Everything that's green is a type of solar panel. That should be very inspiring to us because it's taken humanity a long time to figure that out, but now we're aligning with this ultimate source of power. And just to say fossil fuels are ancient solar energy, right? We're just mining biomatter that's been condensed over millions of years. So if we reframe this, it takes it from burden to opportunity because it creates the idea of a green race. You can have winners in this. This is a new industrial paradigm. This is a growth sector. This is something that is advancing the old paradigm because technologically, it is far, far superior. You're not just digging and burning. It is actually a very sophisticated paradigm which connects to smart meters, the internet of things, batteries. So what I would say to your listeners is that the whole miscategorisation of climate in this political domain. Has done a great injustice to the technological side and the technological framing is what I think is much more appropriate for this. Because then suddenly the way any developing country wants to be technologically advanced, well, why not do it for energy, right? Energy is the backbone of your entire economy. Why do you want to be an 18th and 19th century energy paradigm? It's a very weird way to think about it, right? Like, if someone told you, hey, if you want to expand your transport sector, You should go with 18th century horse carriages because that's how Britain did it. You would laugh, right? You would say that's ridiculous. Why would I do a horse carriage? We have much better technologies today. It's the same thing with a lump of coal or gas, like, honestly, there's a new horizon. Why would we go to old centuries technologies? So that's kind of my response to that. I just think it's a whole circus over there and it's distracting. It's missing the point.

Tobi: Yeah. My final question for you, and this is a bit of a tradition on the show. What's the one idea? It could be your idea. It could be something you've read or seen or heard as elsewhere. What's that one idea you like to see spread everywhere? You’ll like to see people believe it. You'll like to see people live it. You'll like to see people be inspired by it. What is that one idea?

Sugandha: Well, I mean, one thing that I find very inspiring is the fact that sunshine and wind are free. When was the last time anyone ever paid for a ray of sunshine or for a beautiful gust of wind? And sure, we need to build wind turbines, we need to build solar panels, but once you do that, the rest is essentially free. You don't need to dig up more of anything. You don't need to drill wells. You don't need to do these kind of very complex ancillary processes. It's kind of a one step process. You build and then you utilise this abundant free fuel. And to me that's so inspiring. I think that the idea that we live in a world that is already solar powered and, you know, we've had millions of years of evolution and the energy source that evolution has prioritised has been the sun's energy. You know, I take a walk outside and I see a green planet and I'm like, well, you know, chlorophyll is green because that's what taps into the sun's rays effectively. And I think that that is just really inspiring because it's already hinting at this kind of bigger, deeper future. And it's something that I think is very aligned. And I do think that that is something where humanity will go. And in some ways, it's almost like there's always been energy around us, right? Every gust of wind is energy. Every ray of sunshine is energy. We just haven't known how to harness it. So yeah, that's kind of the main idea I would want people to take away with, which is that sunshine and wind are free. You know, why don't we use them more because that is the logical next step in my mind.

Tobi: Yeah, that's a fantastic idea. We'll be sure to help you spread it.

Sugandha: Great.

Tobi: So I mean, it's been wonderful and insightful talking to you. Thank you very much.

Sugandha: Yeah, thanks so much for having me. I've had a lot of fun talking to you.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

Hello, everyone, and this is Ideas Untrapped podcast. In this episode, I explored the challenges of acceptance of free market ideas in Africa with my guest, Tinashe Murapata. We talked about how the struggles of free market ideas can be traced back to historical misinterpretations that link capitalism with colonial oppression. We also discussed the weaknesses of Africa’s electoral politics in prioritizing economic issues and emphasised the need for cultural change to embed economic freedom in public discourse. The conversation concludes with a vision for localized, community-driven solutions to reduce state dependency and encourage market-driven development. Tinashe Murapata is the Chief Executive Officer of Leon Africa, an investment holding company in Zimbabwe. he is also a former executive at Barclays Bank and host of a popular Youtube show called Friday Drinks about economics and policy.

Episode Summary

Introduction

Tobi:Welcome to Ideas Untrapped. It's fantastic to speak to you. I love what you do so much—I’m a huge follower of your YouTube channel. It's nice to speak to a fellow ideas merchant on the continent. So, welcome to the show.

Tinashe:Thank you very much. I really appreciate this.

The Paradox of Free Markets in Africa

Tobi:A couple of weeks ago, I was speaking to an Indian economist on the show, and he said something fascinating. He observed that in America, when he speaks to his colleagues about free markets, they claim the U.S. doesn’t have free markets. Instead, he tells them, “Come to Africa—where you can be in traffic for five minutes, and there are vendors all around trying to sell you one thing or another. That’s the real free market.”

I found that interesting. But later that day, ironically—or unironically—I saw a news report that Nigeria’s communication agency was petitioning Elon Musk’s Starlink for increasing prices without government approval. And I laughed—so much for free markets!

This got me thinking. Price control and general illiberalism in economic policy are deeply embedded across Africa. You’re from Zimbabwe, I’m from Nigeria, and we see this pattern across the continent.

So, my first broad question is: What do you think is holding back the acceptance—or even tolerance—of free market ideas, particularly among the elites and economic policymakers?

Historical Misconceptions and African Economic Thought

Tinashe:That’s a very good question, Tobi. And thank you again for having me.

The answer, I believe, predates us. It’s rooted in Africa’s transition from colonialism to independence. There were two ideological sides at play—the West and the East. Colonialism was associated with the West, which championed capitalism. Meanwhile, the East, which supported African independence, was viewed as the antithesis of capitalism, embracing socialism and communism.

This led to the flawed perception that capitalism was the ideology of the colonizer, while socialism was the ideology of liberation. However, this is historically inaccurate. Both socialism and capitalism originated in the West. Karl Marx himself was European, and socialism predates him—it was fervently supported by Europeans.

Unfortunately, the narrative that communism and socialism “freed” Africa while capitalism “oppressed” it became ingrained in our political and intellectual culture. That misconception remains a significant obstacle today.

To move forward, we need to disentangle ourselves from these historical misinterpretations and critically evaluate which economic system actually leads to human flourishing. And without a doubt, capitalism—particularly from the 18th and 19th centuries—played a key role in advancing global civilisation.

The Role of Economics in African Elections

Tobi:My next two questions are related.

Sometimes, it feels like the economic well-being of Africans isn’t a central issue in electoral politics. Electoral competition on the continent is still more about politics in the traditional sense—identity, ethnicity, and power struggles—rather than economic policies that affect people's lives.

For example, look at the recent U.S. elections. Donald Trump won, and all post-mortem analyses suggest it was largely due to voters' perceptions of inflation. People didn’t feel the economic boom in their pockets, so they voted for change.

Now, in Nigeria, we are suffering from high inflation—especially food inflation, which has reached over 40%. People complain about it, yet when it comes to elections, they don’t express the same anger at the polls. Economic issues do not seem to drive political competition the way they do elsewhere.

So, is this part of the problem? And does the way Africa’s economic challenges are portrayed in international media—where we are always framed as victims—affect how we think about holding our leaders accountable?

Understanding Africa’s Young Democracies

Tinashe:I see your point, but I think we need to be kinder to African nations.

We are young democracies. Zimbabwe has been independent for just 44 years; Nigeria, around 60 years. In the life of nations, that is still infancy. Meanwhile, colonialism lasted much longer. In South Africa, it was close to 400 years.

Our democratic institutions and political culture are still evolving. Many of our governance systems were built within a history of disenfranchisement, where political competition wasn’t based on broad economic accountability. That legacy lingers.

This is not to excuse bad policies. Inflation is effectively a tax on the poor, and we should demand better governance. But we must recognize that political maturity takes time. Sometimes, societies learn through bad policies.

There are two ways to build a great society:

* The Meritocratic Approach – You start with the best people in leadership, ensuring competence from the outset.

* The Competitive Ideas Approach – You allow different ideas to compete over time, and eventually, society discards what doesn’t work.

Africa has largely followed the latter path. Socialist and paternalistic ideas are seductive, so people are often drawn to them. But over time, as failures become evident, they start to reconsider.

This means free-market ideas may take longer to gain traction. But our job is to keep advocating and ensuring these ideas are in the public square. Even if we don’t see the change in our lifetime, it will happen eventually.

The Free Market and the Battle of Ideas

Tobi:I view politics as a battle of ideas. Even identity-based politics is ultimately a form of idea competition. Political actors present their vision, and electorates choose.

Yet, in Africa, the marketplace of ideas seems weak when it comes to free markets. Civil society is filled with advocates for democracy and governance reforms, but very few champion economic freedom. Even in academia, free-market thought is largely absent.

Why is this? Is it just a matter of being “too young,” as you said, or has our education and civic discourse gone astray?

Changing the Culture, Not Just the Politics

Tinashe:This is a crucial issue. Politics is downstream from culture. Politicians do not create ideas—they simply pick up what is already popular in society.

If free-market ideas are not resonating in the culture, politicians will not advocate them. So, our focus should not be on convincing politicians. Instead, we must embed these ideas in the culture—in conversations, in media, and in everyday interactions.

Historically, ideas spread not through institutions but through cultural discourse. That’s why platforms like Ideas Untrapped are important. We need to ensure these ideas are part of the public conversation. Over time, as they gain traction, politicians will naturally follow.

Final Thought: A Vision for Localised Solutions

Tobi:One final question—it's a tradition on the podcast.

What is the one idea you’d love to see spread everywhere?

Tinashe:Local provision of essential goods and services—such as water, streetlights, and electricity—organised at the community level rather than by the state.

If communities own their schools, manage their waste collection, and control basic infrastructure, they become self-reliant. This reduces dependence on government and proves that the state is not always necessary for progress. If this idea spreads, more people will recognise the power of markets and decentralised decision-making..

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

Welcome to another episode of Ideas Untrapped podcast. My guest on this episode is Raymond Fisman, who is the Slater Family Professor in Behavioural Economics at Boston University. He is one of the foremost researchers on corruption and institutional behaviour in the last three decades, and I have been looking forward to talking to him. The main theme of our conversation was the re-election of Donald Trump as the new U.S president and his swift embrace of corporate oligarchs as his new inner circle and power proxies. We also discussed why corporate America is rushing to fall in line and "kiss the ring". This was an enlightening conversation for me, and I do hope you find it useful as well. I also hope to have Raymond back on the podcast for a more global exploration of the topics he covered.

Transcript

Tobi: Hi, everybody. This is Ideas Untrapped Podcast.

My guest today is Professor Raymond Fisman. He's the Slater Family Professor in Behavioral Economics at Boston University. He's a brilliant, brilliant economist that I've been looking forward to talking to for a while. It's a pleasure to have you, Raymond.

Raymond Fisman: It's a pleasure to be here. I'll tell my children that someone said I was brilliant. They'll find that very funny.

Tobi: I think the interesting place I would say to start is what was your reaction to the inauguration two days ago? [This conversation was recorded on January 22, 2025 two days after Donald Trump was inauguarated for a second time as the President of the United States of America] I mean, in some kind of mildly amusing horror, like, I would say I was at the open blatant embrace of the core of American government of oligarchy and downstream of that, corruption. What were your thoughts?

Raymond Fisman: Yeah, I think it's a little hard to know where to begin because there is so much to say and literally relevant news and so far as self-dealing is concerned, as well as obsequiousness of business elites in the U.S. is coming so quickly that if we had this conversation six hours from now, there'd probably be yet more to say about it.

On the one hand, I would say that it was horror, not mildly amused, except that it does almost transcend satire, what's going on, like, you can't make it up sort of thing. But something that I want to be very careful to emphasise throughout is that I really don't want to pin this on a particular party or make this about partisanship, as opposed to we have an individual who has been elected to the highest office in the land, that I think is doing a lot that runs counter to good government. And those are the issues I want to emphasise.

And I do think that we've seen a lot of troubling signs. I did not watch the inauguration. I'm following the advice of my friend, Marianne, who said that to stay sane, she just reads the news in a physical newspaper. Otherwise, it just comes at you too often and too fast.

But some of the things that have emerged in recent days that are really quite troubling are signals that the U.S. is moving towards a much more, if you like, personalistic approach to policymaking. And there's always been a role for connections in the way the U.S. is governed. But it does feel like it's just going to a different scale.

The most recent and high profile example is that of TikTok, where Trump had been in favour of a ban of the app, he met with the CEO and before that, a billionaire Republican mega donor, and he flipped his position on it. Now he is going to be TikTok's saviour. So that's on the one side. On the other side, you see TikTok entirely aware that they need to engage in flattery. So, you know, they personally thanked Trump for his intervention Monday morning after it was brought back from a very brief ban and now has a 90 day extension. But again, Trump has sworn to save it.

So it's this kind of very personalised, very public favour trading is clearly sending a message to business that they need to fall in line in order to remain profitable in Trump's America. And you can easily, or I shouldn't say easily, you can imagine sliding into a system in which we have something closer to what's termed competitive authoritarianism, where you do hold elections, but the media, as well as the levers of government, are so commanded by the party in power that oppositions are playing from such a disadvantage. We've seen this emerge to some degree in India. We've seen it emerge in Hungary. We've seen it with X. We've seen it with other sites. We've seen it, to some extent, with Facebook very recently. You can see it potentially emerging in the U.S.

So I do see a lot of troubling signs, and it is certainly a collective project to push back against these trends.

Tobi: One thing that I was surprised, you might not be, given that do work in this area is how quickly people fell in line once Trump won or it looked like he was going to be the next president and you know you had this scrambling for people to get face time in Mar-a-lago to book hotels and to basically make deals and then it does make me wonder that, yeah, like you said, the U.S. is shifting to a more personalistic type of governance. But do you think that the quickness or the way that this shift is rapidly happening before our eyes has something to do with perhaps grievances in whatever form with good governance generally or impersonal bureaucracies? You know, because there's so much gripe about the elites or the deep states and how they have failed. And this is how the people are getting the power back. But of course, we know that's not what it really is. But what exactly about the status quo stopped working to give us this shift we are seeing to a new equilibrium?

Raymond Fisman: I'm sure there are many things and one always runs the risk of naming the thing that you think is most important, or even worse, the first thing that comes to mind, and presenting kind of a monocausal case. So I'll say that I'm going to name the thing that I think is most important. It's the first thing that comes to my mind. I'm sure there are many factors that are pushing in this direction, including what you described, people being perhaps dismayed - that it's going to be related to what I say, including what you say about the seeming gridlock of the U.S. government.

But what troubles me most and what I think is perhaps enabling the most is increased polarisation, which is more extreme in America than elsewhere, but is also a global phenomenon. It shows up very clearly in the data. The extent to which people identify as left versus right has been steadily widening over the past few decades. And somehow it tinges everything, including people's views of good governance, with a partisan lens.

So somehow all that has come to matter is, is he my guy or is he not my guy? As opposed to, is this an honest, competent guy or a dishonest, incompetent one? So somehow people's views, people's attention is entirely drawn to partisan questions, rather than good versus bad government questions.

The fact that businesses fell in line so quickly, it is kind of hard to fault them, given the opening example of TikTok. That seems to have already reaped tremendous dividends for the company. If I take at face value, the stock price of Tesla as some summary measure of how valuable it is to have the president's sympathies. It went up by around 30% in the week following the election. There are lots of companies that appreciated in value for reasons that can easily be tied to policies. For-profit prison companies went up by a lot. That's because of anticipated immigration policies. Other carmakers, and especially electric carmakers, did not do so well. So what's special about Tesla, that's not like a big secret. It's that its biggest shareholder, Elon Musk, was a tremendous financial and personal backer of Trump. So if you say, well, being well-connected to this government is worth 30%, that's a pretty good incentive to fall in line.

I will note as an aside, or maybe not as an aside, something that's very directly related. So my PhD thesis was on the value of political connections in Suharto's Indonesia in the mid-1990s. And my thesis looked at what happened to the value of well-connected companies when there were threats to Suharto's health. And if you take the results of my PhD thesis at face value, connections in America now are worth something comparable to what they were worth back in mid-90s Indonesia, which at the time was viewed as one of the most corrupt countries in the world.

Tobi: I mean, a recent example in Nigeria is a particular oil company that was in trouble for a while, running to about five years, was on the edge of bankruptcy and could not even publish its annual reports. And after the the last election, we've had a new government now for 18 months. After the last election, due to the perceived closeness - I mean, it's an open secret - of this same company to the new president, it's recovered tremendously. Its financial fortunes have recovered tremendously to the point that during the Christmas party last December, this same nearly bankrupt company hosted the three biggest musical artists in Nigeria to its annual Christmas party.

So I read the Indonesia paper a long time ago, and one thing I want to draw your attention to, maybe with a bit more of an international lens, is the role of ideas here. I know you talked about partisanship, and I hope we'll get to unpack that a little later. So there is a general acceptance now, especially in the subfield of what we call development economics or international development scholarship generally, that some form of corruption is not so bad, right?

Since you… I don't know how much you followed that field, but a lot has happened since your paper. You know, there's this subfield of political science meshed with economics that talks about political settlements. Scholars like Mushtaq Khan have said that, well, some corruption can be beneficial to growth and not all corruptions are bad. You can see the flavour of that with what is happening with Donald Trump, right? Because, I mean, again, a couple of weeks ago, I read an article in The Economist's which I consider to be embarrassing, was more or less making the same point that, hey, listen, folks, corruption is not as bad as you think, because there are evidence to some exceptions. So do you think that these situations where you have economies that are sufficiently big to challenge traditionally big Western economies, like China, like India, like Brazil, who we might describe as, you know, relatively more corrupt than Western countries, but who seem to be doing so well, you know, because when you talk to a lot of Silicon Valley guys, they talk about China and how they get things done and how it is impossible to build or do anything in the U.S. because of bureaucracy.

So, are we seeing the influence of ideas here that, well, corruption might not be the worst thing in the world as long as we can get some growth, we can build new nuclear reactors and build new roads and have high-speed railways? So is that a bit of what we are witnessing here?

Raymond Fisman: Yeah, I mean, there's an awful lot in that question. So at the risk of taking a bit of time to respond to Let me make a few observations. So first of all, you're absolutely right that the idea of efficient corruption has been floating around in the literature and out there in the so-called real world for some time. There's the classic article by Nathaniel Leff that refers to Brazil specifically and contrasts it with Chile. And that's, I think, a useful starting point for this view; which is precisely as you described, that you have “bad” government policies, bad in quotes here, but bad for growth, and thank goodness for corruption because it affords some workaround.

Now, the most standard response to that view, which I think also has some legitimacy, the grease-the-wheels view of corruption, is the so-called endogenous regulation perspective, which is definitely worth mentioning in this broader discussion; which is that once bureaucrats and politicians know that the way that they can extract payments is by creating onerous and burdensome rules, they just make more and more rules because that's the way they extract their side payments.

So you can end up with hopeless amount of red tape where businesses spend even more time dealing with bureaucrats and still pay bribes than in a corruption-free world. So this is a debate that remains in progress 30, 40 years after the Nathaniel, more than 40, a half century maybe after the Nathaniel Leff article. And you can easily marshal evidence on either side of this view.

The second point, you mentioned China. I think just empirically, it is worth observing that, you know, I give the case of Indonesia. I can even within Indonesia say, well, here's the good and here's the bad of it. Suharto took over in the mid-60s. He was a brutal dictator. So what I'm about to say is just about the economy. It's not about human rights abuses or torture or other horrors that took place under Suharto. The country grew very fast for 30 years under his rule. And if I take as my main overall view that, yeah, all else equal, less corruption is better than more corruption, we do have to confront these uncomfortable case studies of Indonesia under Suharto. It is also worth noting that he put in place a system such that when the regime fell in 1998, it had a GDP drop of 15% in a single year.

So in some sense, it was a fragile foundation that the economy was built on. Going to China, you see the same thing. Whatever you think of the country's most recent anti-corruption crackdown dating back to the early 2010s, from the 80s to the present, the country has grown tremendously in a system that was widely viewed to be quite corrupt. We definitely want to understand, and there's been a lot written on what might make China corruption different, from, say, Haiti corruption.

I pick Haiti not at random. There was this devastating anecdote. I believe it's Baby Doc, not Papa Doc, who at some point there was a railway that connected Port-au-Prince to the second largest city in the country whose name is escaping me. This is a productive asset for the economy, but for long-term prosperity. But for short-term gain, Papa Doc sold the railway ties to a multinational company that boxed up the metal and shipped it overseas.

That's like the ultimate short-termist thinking that a so-called roving bandit in the economics literature, someone who's not thinking about harvesting benefits year after year after year. So the question of, broadly speaking, is corruption good or bad, I feel like there are relatively few people who will say, all else equal, I want more corruption. I think there are relatively few people when they take the broader view of here's the evidence on Brazil versus Chile, China versus Sweden, etc., say, yeah, we want to add some corruption to the system.

But we're not really taking all else equal, are we? We're saying, well, we have this system in Indonesia, that The system in China, again, whatever you think about their social or other policies, have grown tremendously. China's brought an enormous number of people out of poverty. We need to understand what worked in that system. Now, the last thing I'll say on this is if we come back to the U.S. So, first of all, there's some of what you're describing in what seems to be going on with Elon Musk where he seems to be actively lobbying to have government litigation against him dismissed for environmental violations and so on.

So whether you think that the rules are set too tight, such that, oh, great that we can be unshackled from all of this pointless red tape, or whether you think, oh, now he's free to kill us all with whatever he's releasing into the atmosphere for the sake of greater financial return, that I'm not going to take on. But it does fit with your broader narrative of the trade-offs. I think what troubles a lot of people is when you get into a system of personalistic policymaking where profits are determined and part of a longer conversation would involve how this might fit in with the China model especially. When the system is set up such that profits are dictated by favour-seeking and personal connections, that's what companies invest in.

You don't invest in building the best electric car. You invest in making the best connections to government. And if you want to link to the larger economics literature, in a way, this is what the Nobel Prize was awarded for this past year on the role of extractive institutions and development. Sorry for that long answer, but what you asked, there's really many pieces to it. I've tried to give just the briefest of surveys of a response.

Tobi: Yeah. And one thing that does worry me, and maybe this is not a direct question, but I would like your reaction to it. What does worry me is the overseas effect. I know that, yes, Americans have a lot to be worried about. But, you know, in situations where some of the domestic rules against corruption in places like the United States and the UK have also helped to fight or, at least ,keep corruption at bay in many economies, Nigeria included.

There are many laws in the U.S. that prevent American companies working in Nigeria from, I mean, engaging in certain things and certain practices, whether it's environment or bribery and so many other things that they are used to doing in the 80s and 90s. And if we have a situation where companies can leverage personal relationships with executive to sidestep those rules. I fear they will also be unshackled internationally and we just might be back to some bad old days.

Yeah.

Raymond Fisman: So again, there's a lot that is embodied in this question, but I'll still try to be brief. So what you are describing, I think very legitimately, is the fact that, okay, Swedish companies don't pay bribes in Sweden. But what's Skanska doing when they're operating overseas, which they do a great deal? And for a while, Transparency International tried to produce a bribe-payers index, which was meant to evaluate the extent that companies based in particular countries felt more empowered to pay off public officials outside of their own countries. That proved to be hard to do for reasons I won't get into. It didn't last very long. But I do think this question of what is the role of multinationals operating in Nigeria, operating in Brazil, operating in Colombia, what is their role in promoting or enabling a corrupt system is really an important and understudied one.

On the very specific question of US companies, i was very concerned in 2016, as I think many people were. Enforcement of these foreign anti-bribery laws, I think the sense is mixed. So we do have some very high profile cases, Siemens being the biggest. But as I said, I don't think this is extremely well studied, so it's hard to kind of give an overall well or less well enforced. We do know that Foreign Practices Act enforcement in the U.S. did ramp up in the 2000s.

I think there was a lot of concern that in 2016 it would fall off a cliff. And it didn't really. So despite any worries we might have had about Trump meddling in the Justice Department, that one didn't really seem to come to pass. Am I worried again in 2025? A hundred percent. And I guess we'll have to see. As with many instances in which there are legal constraints, but also, I guess I might say moral constraints, this is my excuse to say that some of the responsibility rests not with the U.S. government, but rests with U.S. business people. And dare I say, even the institutions like Boston University or Columbia University, where I used to work at the business school, in educating people who will run the businesses that operate in Nigeria or Colombia or Brazil. And that, again... business education and whether we can and should try to inculcate a sense of business principles is probably for another conversation.

Tobi: So I want to return to the partisanship question, which is, I think it's generally accepted that some contest is necessary, if not perhaps mandatory in a democracy. But what are the ways in which partisanship drive polarisation. Because for me personally, I worry about this too. I mean, the last elections we had in Nigeria was super online and hyper-partisan, right? It's not so clearly ideological as it is in the US in the case of right versus left. In our own case, it's usually ethnic, which I would argue is even far more dangerous because there may be violence. There's threats of that in the U.S. as well.

Raymond Fisman: Yes, I was going to say. And also, I will say that it feels almost tribal in the U.S. in terms of people just like aligning themselves or identifying, that's the right word, they identify with one group or the other. So I'm not sure how different it is. As you were describing it, that's what I was thinking. It feels very identity based.

Tobi: Yeah, so I want to learn from you. I know that there might not be a simple answer to this. There rarely ever is in social science anyways. So how does something as necessary and even essential, you know, having a viable, active opposition, you know, partisanship generally, then drive polarisation to the point where people are unable to agree on certain basic rules of how a government should work. I mean, something that really shouldn't be up for debate.

Raymond Fisman: So I'm going to give more of a descriptive commentary than say anything about what we could hope to do. I think it's actually quite important to recognise that if you go back a half century, exactly, again, as you described, the hand-wringing and concerns went in the opposite direction. There's a great essay by an eminent political scientist from the 70s talking about how these concerns, these worries since the 1950s, that the two parties were just becoming too much alike. So people didn't actually have viable options. There was just one option, which was the dead center. And in a way, it's easy to see how something like the median voter theorem, which describes this force that drives parties to the average voter preference, how it could emerge in that world.

Since then, people have amended the median voter model to account for the fact that we can also have this splitting apart. I want to actually mainly just make one observation that comes from an economist who was a politician for some period of time and worked in politics, or maybe two observations, which is one of his great frustrations was that issues are not valuable unless in a polarised system. And this just drives further polarisation. You can think about this as all feeding on itself. An issue is only valuable politically if it's a wedge issue. So, for example, if everyone can agree that we need better science education in schools, then no party is going to take that up as their cause. Whereas more religion in schools, that's something for which it can be us versus them, a means of differentiation. It is also not a bad thing for the parties themselves. Think about a model of monopoly. You really love to have your captured market because then you can lead the quiet life of the monopolist. You can be lazy and stupid because they're going to vote for you anyway. So it's in the party's interest to do this. So we do see, tempted to say, absurd versions of this in U.S. politics recently, which is the Democratic Party funding to extreme Republicans to try to get extreme candidates to into the general election because that way they're sure to win. They don't have to try to get voters because the opposition is so far to the extreme that it makes it easier to win the election.

And so how we got here and how we will escape from it, I'm tempted to say either that's not my department. I'm really focused on good government issues as opposed to understanding polarisations, or it's above my pay grade, like this is, as far as I'm concerned, the great challenge facing U.S. society. But I also do see it as essential precisely because it's distracting us. It's getting us to focus on religion in school rather than science in school.

Tobi: Two questions before I let you go. One is, yeah, I know that you are Canadian also, But I was reading Joseph Wallace's paper a while back, talking about the distinction between venal and systematic corruption and using America as a case study.

Raymond Fisman: Sorry, I missed the first one. Something in systematic?

Tobi: Yeah, venal and systematic.

Raymond Fisman: That's what I thought you said.

Tobi: Yeah. So this isn't particularly a new territory for the U.S., as historians would say. So what can you say that America can learn from its history to deal with what is happening now?

Raymond Fisman: Yeah, I'm going to try to end on an optimistic note, which is that I think this is something that people were concerned about in 2016 as well, and it really never came to pass. And so I do think we just have to remain alert to these concerns. As an American or a Canadian I can still say whatever I want, I can still write whatever I want, I can still try to persuade whomever I want that my perspective has merit and there are many places in the world where I cannot do that. And so in a world or in a country where we still maintain these civil liberties, it still feels more possible to find our way back to a system of constructive exchange on what really matters.

I do think what concerns me, and this brings us back to the very beginning, is if we are moving towards what some have called competitive authoritarianism, what Sergei Guriev and Dan Treisman call spin dictatorships, I think of those as being not entirely different from one another we're potentially moving to a system where, again, like, I can say whatever I want to say but no one's listening. They're tuned into whatever Elon Musk or Donald Trump is saying. So we'll see, there's still a long way to go before America loses its democratic processes and institutions but it's entirely possible that we can stumble down that path.

Tobi: My final question, please feel free to answer as long as you want. A couple of weeks ago, you wrote an essay in the New York Times about the Department of Government efficiency that will be run by Elon Musk. And generally, the attitude amongst a lot of people that might not even be hyper-partisan has been one of optimism that, oh yeah, the government can use some efficiency. A lot of my friends, even here in Nigeria, mostly work in tech, are also optimistic that, oh yeah, this would be a model that is presumably exportable as a governance model for other parts of the world. What's your central critique, especially drawn from that piece? What is the flaw, central flaw, in the idea of running a government like a private business?

Raymond Fisman: To be clear, I'm all in favour of government efficiency. I don't want to equate that to, as you described, and as it's too often equated to, running government like a business. Because a business, its primary purpose is to maximise profits for some residual claimant on that profit, shareholders or the owners. Whereas a government has a much more complicated, job, which is, for example, catching terrorists, setting up schools, building roads that serve everyone, to benefit entire communities. And in general, the jobs that businesses do are relatively simple because there's generally a clearer mapping from action to desired outcome, which is higher profits. The jobs that governments take on tend to be a lot more complicated and harder to measure the outcome and give incentives for success.

And so if we decide, oh, we're going to run the U.S. government the way we run Tesla, which involves measurable outcomes for every action we might take, it's a standard problem in business as well, you end up distorting efforts to achieve something you can measure rather than something that you want. Part got cut out of that article was I wanted to mention Boeing, that this sort of thing happens in businesses as well. You're in the business of building really great planes, which is a complicated thing. Do involves lots of, again, relationships and long-term planning. And you bring in a CEO that's really just focused on shareholder profits. You stop focusing on the more complicated long-term agenda, and all you do is focus on this single, easy to measure, but not necessarily most important thing.

I'm not sure that I gave the best description of that. I guess I would refer your listeners to the New York Times article, where I had lots of time to sit down and spell out with care the argument here.

Tobi: Yeah, I'll put up a link to that article in the show notes. So final question, which is a bit of a tradition and maybe some upbeat ending to the overall gloomy tone of this podcast is what's the one idea that you are excited about at the moment that you would like to see spread everywhere? You like to see other people get excited to be your idea, maybe from someone else you admire or any other source.

Raymond Fisman: Oh, goodness me. I wish you had prepped me for that so I don't have to answer off the top of my head. So I'm going to end up giving an answer which isn't necessarily like this is the thing as opposed to this is the thing that I was thinking about this morning, which is that I do think people need to feel more empowered to influence organisations in the direction they want them to go in. And so what makes me think of this is, as reading this morning about shareholder democracy, if we all want ExxonMobil to behave differently as a company, if we all want Siemens to behave differently as a company, who gets to decide, if it's the owners, then I get a little voice. And just as I vote in every election, I really should take much more seriously my job as a steward of ExxonMobil and Siemens. And hopefully all of our little voices will add up to something bigger. And maybe that's the larger point, is we need to take more seriously our little voices and how they impact some larger societal outcome.

Tobi: Thank you so much, Raymond. It's been fantastic talking to you. Any other thing you would like to share that you'd like us to know that you've been thinking about lately?

Raymond Fisman: No, thank you very much. This last one relates to… I've been working on a book on whether business will save the world or destroy it. The answer obviously being neither. And yet there are people who believe very strongly in one of these two views. And so I'm excited to try to communicate to the world how these two different groups come to these very different conclusions and what we might do if our objective is to make business the greatest force for good.

And that's partly where my answer to what's your big, important idea, that's partly where that comes from.

Tobi: I mean, when your book is out, maybe I'll get you on for another episode.

Raymond Fisman: It would be a pleasure.

Tobi: I did enjoy the last one I read, which was the one with Tim Sullivan, The Org. I did enjoy that very much.

Raymond Fisman: Thank you very much.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

Happy New Year to our listeners. This is the first episode of the year, and I had a conversation with Oliver Harman about global value chains (GVCs), foreign direct investment (FDI), and regional governance in economic development. Oliver and I discussed how GVCs have evolved, the crucial role of multinational enterprises in knowledge transfer, and why regional governments—rather than national ones—are often better positioned to shape policies that maximize benefits from global trade. The conversation highlights the importance of GVC-sensitive policies, investment promotion agencies, and upgrading strategies to help economies move up the value chain and develop their economy. Oliver Harman is an economist. He specialises in spatial economics and economic geography. He is a Senior Policy Economist for the International Growth Centre at the London School of Economics and Political Science. He is also a Research Associate at the Blavatnik School of Government, University of Oxford. His book with Ricardo Crescenzi, which was the subject of this podcast, can be found here.

Transcript

Introduction

Tobi:Welcome, Oliver, to Ideas Untrapped Podcast. It's wonderful to have you here. I have to say that your work, along with Riccardo Crescenzi, is one of the most refreshing things I've read in the last couple of years on global value chains. It's a wonderful book. I'll put up links to how people can access it in the show notes, and I think everyone should read it.

I want to start with the basics. The phrase global value chain is frequently used in economic discourse, particularly in discussions about geopolitics. But what exactly are global value chains? How would you describe them?

What are Global Value Chains?

Oliver:Thank you for having me, Tobi, and for your kind words on the book—it is much appreciated. I can provide you with an open-access overview of the book for your listeners who may not be ready to purchase the e-book but want a taste of its content.

To answer your question, global value chains (GVCs) have gained prominence academically since the 2000s. Before then, there was little academic literature on them, and even less in policy discussions. This book emerged from that gap.

A useful way to conceptualize GVCs is through an evolution of economic thought. Traditionally, economists described trade in terms of final goods—like the classic example of England producing cloth and France producing wine, and then trading them. GVCs, however, break down final goods into intermediate parts.

Take the bicycle as an example. Many think of it as a single product, but a Canadian photographer once disassembled one and found 571 intermediate components, all researched, designed, produced, packaged, and marketed in different regions across the world. The same applies to more complex products like smartphones, where an iPhone or Samsung device contains thousands of parts sourced globally.

GVCs have completely reshaped how we think about trade—moving beyond final goods to the intricate networks of intermediate goods and services that contribute to production.

Evolution of Global Value Chains

Tobi:How have global value chains evolved over time? What key events have shaped their trajectory over the past 20 to 30 years?

Oliver:That’s a great question. GVCs have gone through different stages of transformation.

* 1990s-2000s Boom: Trade became more fragmented, and participation in GVCs surged. Nearly every industry saw increased participation, with 40-50% of trade occurring through GVCs.

* Post-2008 Financial Crisis: GVC expansion plateaued. The crisis led to economic restructuring, stabilizing GVC participation at previous levels.

* Recent Trends (COVID-19 and Beyond): The pandemic disrupted global supply chains, causing temporary shocks. While GVCs held steady, they are now evolving in response to technological advancements and geopolitical changes.

This makes it more critical for economies to find the right GVC for their development, rather than just benefiting from an overall expansion of trade.

Multinational Enterprises and Governance in GVCs

Tobi:Your book highlights three key aspects of GVCs:

* Multinational Enterprises (MNEs)

* Foreign Direct Investment (FDI)

* Regional Governance

As a Nigerian, I’m particularly interested in MNEs. We've seen many multinationals exit the country in the past six or seven years. Some policymakers argue that local investors can replace them, so it's not a big deal. But can you elaborate on the governance role that MNEs play in GVCs?

Oliver:Absolutely. Multinationals are the governing arm of GVCs. They control and structure value chains by determining how production and trade flow across different regions.

For regional policymakers, engaging with MNEs is crucial. They are at the frontier of technology and knowledge, and when properly integrated, they can transfer expertise to local firms. This is particularly important for emerging economies—it allows them to leapfrog to higher-value production.

However, MNEs can also be extractive if not managed properly. So, it’s important for governments to structure policies that maximize benefits while minimizing exploitative practices.

Governance Policies for Maximizing Benefits from GVCs

Tobi:How can governments and policymakers structure governance around MNEs to ensure they enhance local economic growth?

Oliver:We argue for Global Value Chain-Sensitive Policies, which explicitly consider how policies interact with GVCs. Some examples:

* Investment Promotion Agencies (IPAs):

* These agencies attract the right investors suited for the local economy.

* Evidence shows that subnational IPAs (e.g., at the state level) are often more effective than national ones.

* Skills Development Aligned with GVCs:

* Training programs should be customized based on industry needs.

* Example: The Penang Skills Development Centre in Indonesia worked with MNEs to align workforce skills with global industry demands, leading to economic transformation.

Foreign Direct Investment (FDI) and Upgrading in GVCs

Tobi:Some countries like Vietnam, Poland, and Malaysia have effectively used FDI to upgrade their economies. What are the general lessons from their success?

Oliver:The key takeaway is that quality of FDI matters more than quantity.

* Traditional Thinking: Measure FDI by the sheer amount of money coming in.

* More Effective Thinking: Assess what type of FDI is being attracted.

For example:

* $100 million in basic assembly work adds less value than

* $10 million in high-tech R&D investment, which has long-term benefits.

Upgrading within GVCs involves moving from low-value tasks (e.g., assembling phones) to higher-value tasks (e.g., designing microchips). This is the essence of economic transformation.

Regional Governments and GVC Policy

Tobi:You emphasize regional (subnational) governments as key players in GVC policy. Why focus on regional rather than national governments?

Oliver:There are two reasons:

* Granularity of Data:

* National policies aggregate data, ignoring local variations.

* For instance, a port city has different needs from an inland capital city.

* Local Expertise:

* The people of Lagos understand their economic strengths better than the national government in Abuja.

Empowering subnational governments allows for more tailored, effective policies.

Challenges in GVC Data Collection

Tobi:How can regional governments access reliable data to guide policy?

Oliver:Data is crucial but often lacking in emerging markets. Solutions include:

* GVC Mapping Exercises: Identify key industries and their global connections.

* Global Datasets:

* Inter-Country Input-Output Tables

* OECD’s Trade in Value Added (TiVA) database

* Firm-to-firm transaction data

Final Question: One Idea Worth Spreading

Tobi:What is one idea you’d like to see widely adopted?

Oliver:The value of global trade and specialization.

Many policymakers today are pushing for economic nationalism—wanting everything made domestically. But different regions have comparative advantages, and trade creates mutual benefits.

We must resist mercantilist policies and embrace efficient global cooperation.

Closing Remarks

Tobi:That’s a fantastic idea. Hopefully, we move past the current mercantilist mindset. Thank you, Oliver, for being on Ideas Untrapped.

Oliver:Thank you, Tobi. I appreciate the opportunity to discuss these ideas with you and your listeners

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

In this episode of Ideas Untrapped we discussed the challenges and complexities of education, economic growth, and public health systems in developing countries with two brilliant guests James Habyarimana and Jishnu Das. We started off with an example on the rapid expansion of tertiary education in India and its unmet promise of better jobs, which led to discussions on similar dynamics in African contexts. The conversation explored the balance between market-driven growth and government intervention, emphasizing the need for robust processes and inclusive dialogues to address inequality, improve infrastructure, and shape a collective vision for the future. James Habyarimana is the Provost Distinguished Associate Professor at the McCourt School of Public Policy. His research is focused on identifying low-cost strategies to address barriers to better health and education outcomes in developing countries. Jishnu Das is a distinguished professor of public policy at the McCourt School of Public Policy and the Walsh School of Foreign Service at Georgetown University. Jishnu’s work focuses on health and education in low and middle-income countries.

Transcript

Tobi: Welcome to both of you. This is actually the first time on the podcast that i'll be hosting two guests at the same time and i feel so lucky that it's both of you, so welcome to Ideas Untrapped it's fantastic talking to you.

Jishnu: Great to be here, Tobi. Glad we're doing this.

James: I feel privileged to be sharing this time with both of you.

Tobi: Okay, thank you. You can take turn to answer as you choose. What inspired me to do this episode primarily was a very powerful article by Jishnu talking about

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college education and how young people may have been shortchanged by the promises

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and what the evidence suggests.

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So briefly,

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if you can just summarise for us,

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Jishnu,

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what inspired you to write that piece and what were the major findings?

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Jishnu: Yeah, sure, Tobi.

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And I'll ask James to talk about the African context.

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I mean, I know India fairly well.

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And one of the things that's so surprising and, you know, when people in the U.S.

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or people elsewhere hear it,

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they don't realise just how fast college education and college enrolment has

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increased in the country.

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Right.

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So one of the statistics that I got wrong because I couldn't believe it is between 2003 and 2016,

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India was building a new college every eight hours, right?

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And you think about a number like that and you say, what happened here, right?

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It's completely out of the experience that any of us has ever seen.

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There's a real, real thirst for education among young people.

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And it's not just a certain group.

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We are seeing it in all kinds of socioeconomic status, girls, boys, men, women.

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And it's interesting,

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like in a country like Pakistan,

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which is traditionally thought to be very patriarchal than it is,

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there are more women in college now than men.

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So there's this huge upsurge,

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maybe a huge demand for college education that's being met by all kinds of places.

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And, you know, education is a bit like looking at the stars.

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You're going to see what happened in the past in terms of, OK, all these guys came into college.

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What's going to happen to their lives after that?

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And that part is not clear.

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So India has grown a lot.

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It's a huge success story on some fronts, kind of.

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But really, more than 90 percent of the jobs are still informal.

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And we keep thinking BPO, you know, business process outsourcing.

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They're taking a lot of outsourcing jobs.

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You know,

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there's so little of that in actual numbers that it supports less than a percent of

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the population.

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So the question,

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the big question that comes is,

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OK,

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all these guys who are going into college,

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they're going in with the expectation that their lives are going to be a lot better.

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And are we going to be able to meet that expectation?

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And the phrase that people use is, you know, we have the so-called demographic dividend.

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where we have lots of young people and fewer older people.

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And the right way to think about it is how do we make sure that that demographic

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fraction which we call a low dependency ratio is a dividend and doesn't turn into a

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nightmare when you suddenly have these tons of people who are like,

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look,

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you sold us a dream.

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You told us that if we make it through the schools,

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which are not great,

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and we go to college and we finish our college,

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We'll get a decent job.

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Where is that job?

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That's why I called my blog a coming of rage story, because our college education has come of age.

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And the big question now is whether it's going to come of rage as well.

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And that's kind of, you know, where I left it.

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But I don't know.

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I mean,

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James,

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do you find kind of similar patterns in Uganda or in Tanzania where you work or

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other countries?

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James: Right.

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I guess I want to start by saying, yes, I mean, Africa is in some ways pretty, pretty diverse place.

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And so I'm going to focus a lot of my comments on the places that I'm familiar with,

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which would be East and Southern Africa.

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Tobi: Yeah.

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James: But I fully expect,

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as I was saying to Tobi,

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I've done some work both in Lagos and in northern Nigeria on education.

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So even though this is a little bit a while ago,

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so I don't quite understand the long run trends and,

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say,

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demand for college.

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But, you know, Africa is a very young continent.

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In many parts of Africa, the share of the population is under 30, you know, is close to two thirds.

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And so, yes, there is the same dynamics in terms of expectations of a better life.

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And of course, I think this is the challenge for politicians.

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So

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So earlier when Tobi was saying maybe,

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you know,

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infrastructure projects get more attention than,

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say,

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education,

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I actually think in the places where I work that,

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in fact,

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education gets much more attention because politicians are concerned about this rage,

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right?

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They're concerned about this gap between people's aspirations and essentially kind

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of the opportunities that are available when they finish school.

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I think that is a huge problem.

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Even in places,

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actually,

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the northeastern Nigeria,

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where I started to do some work on kind of apprenticeship programs,

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there's a lot of attention being paid to addressing essentially kind of this gap.

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Because I think ultimately,

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and I think most political scientists have suggested that essentially kind of the

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share of males between the age of 15 to 29 who are not engaged in school or active work,

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in some ways can be a major source of instability.

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And so I do see the same concerns.

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There's certainly been an explosion in

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in terms of tertiary institutions outside of government.

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And so there are many more private institutions in East Africa than exist,

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say,

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you know,

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20 or 30 years ago.

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I don't think people are building universities or colleges at the same rate as they are in India.

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But there's certainly kind of an attempt to respond to the exploding demand

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And I think ultimately the question for whether there's a demographic dividend or not,

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I mean,

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I've certainly made the case in other fora where I've said,

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look,

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we need to essentially kind of take advantage of this opportunity and we need to

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give these young people the skills to be effective in the world.

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But I think ultimately there is kind of a bigger question about sort of can these

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places produce the jobs and find the markets to really deploy these people?

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Yeah,

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so I hope we won't start the conversation by essentially kind of talking about rage

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as opposed to the high hopes.

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But yeah,

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I think many places where I work are facing the similar sort of challenge of,

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you know,

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how do we convert this opportunity into prosperity as opposed to civil conflict?

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Tobi: So I think for me, the rage...

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question is sort of unavoidable.

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Perhaps the evidence might tell us differently, but at least on some level of perception.

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Certainly, it's a story that resonates with me.

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I mean,

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I live in Lagos,

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Nigeria,

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and I can certainly tell from my observation that you see an army of young men from,

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say,

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18 to 25 with

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absolutely nothing to do, you know, just walking the streets, standing on the corner.

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So what I want to tease out with my next question is the intersection of skills and jobs, you know.

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So on the one hand, there's been this great expansion.

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I think it's certainly true, also of Nigeria, the expansion in tertiary education is crazy.

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Like private schools must be

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Now,

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I don't have the data immediately,

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but I think private universities must now outnumber public universities in Nigeria.

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You can certainly see the same trend in secondary schools.

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But at the same time,

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when you speak to employers,

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the story they tell is that,

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yes,

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there's a lot of schooling,

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but these folks are not really skilled.

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And then recently,

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the National Bureau of Statistics did a labour market survey and what they found is

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like 97% of jobs in Nigeria are still in the informal sector,

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right?

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So is it that we are not creating enough formal sector jobs or the inadequate

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formal sector job is itself a consequence of the quality of education?

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James: That's a great question.

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Let me try and take a stab at it.

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So my view is that clearly causation is running in both directions.

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But I actually would say that,

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in fact,

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I think it's the absence of better jobs that is possibly keeping down the quality

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of education more than essentially kind of the other way around.

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You know, we've written about the demographic dividend in, say, Southeast Asia.

(00:08:33):

I think those were places where, in fact, the export markets essentially kind of provided lots of jobs.

(00:08:38):

And it wasn't that the people first got education and then got the jobs.

(00:08:42):

I mean, you know, in some ways, the question is, why do people get educated?

(00:08:45):

There's a nice paper that talks about,

(00:08:47):

ultimately,

(00:08:47):

should we worry about education policy and improving quality of schools?

(00:08:51):

Or should we worry about how to essentially kind of grow the economy, expand opportunities?

(00:08:56):

And then in some ways, people will then respond

(00:08:59):

to those opportunities by getting the education that essentially maximises those opportunities.

(00:09:05):

One way we can generate lots of opportunities is to come up with great new ideas.

(00:09:09):

Great new ideas create new markets,

(00:09:11):

and you could argue that innovation requires a high-quality education system.

(00:09:16):

But I think for many countries that are growing from the levels where Nigeria,

(00:09:21):

Kenya,

(00:09:21):

Zimbabwe are at the moment,

(00:09:23):

My sense is I don't know that the kind of innovation that we're talking about is

(00:09:27):

essentially kind of the most important thing.

(00:09:28):

I think the lowest cost path is to find manufacturing related markets where,

(00:09:34):

in fact,

(00:09:34):

you can employ lots of people, where you don't need people to have PhDs and be

(00:09:39):

creating patents to get the economy started.

(00:09:41):

I suspect Jishnu might have a very different take on this.

(00:09:43):

But I think my view is it's the opportunities first that shape the education system

(00:09:48):

rather than output of the education system in some ways failing the country.

(00:09:52):

Even though I should say I think both of these directions are important,

(00:09:55):

I think, I certainly would put much more weight on the former.

(00:09:59):

Jishnu: So, Tobi, your podcast is Ideas Untrapped?

(00:10:02):

And the second part you didn't tell us, it's like Speakers Trapped.

(00:10:06):

I mean, that's one of the deepest questions I've heard in a long time.

(00:10:12):

And I'm going to push it back as a question to you and James, but it's a question that worries me.

(00:10:18):

And just to quickly summarise,

(00:10:20):

you probably already know this,

(00:10:21):

but just to summarise kind of three big thought pieces that are out there.

(00:10:26):

So Dan Rodrik,

(00:10:27):

Kennedy School's been arguing that countries that are not already doing a lot of

(00:10:31):

manufacturing have basically missed the manufacturing bus.

(00:10:36):

And he's arguing that unlike, say, the U.S.

(00:10:39):

or U.K.,

(00:10:40):

which deindustrialised much later down the employment chain,

(00:10:45):

a lot of countries,

(00:10:47):

including Brazil,

(00:10:48):

including other places,

(00:10:49):

are deindustrialising prematurely,

(00:10:51):

right?

(00:10:52):

So he's saying, look, the manufacturing bus is lost.

(00:10:54):

I mean, if you think you're going to generate those jobs through manufacturing, it's gone.

(00:10:59):

I don't know how right these are, but let's just put these out there.

(00:11:03):

And then interestingly, Rohit Lamba, who is an economics professor, has this

(00:11:10):

very interesting book with Raghu Rajan,

(00:11:12):

who was earlier our central bank governor and professor at Chicago,

(00:11:17):

basically arguing that if India has to grow…

(00:11:20):

So this is similar to Dani and they're saying,

(00:11:23):

you know,

(00:11:23):

it has to kind of give up on this idea of manufacturing and move to really high

(00:11:27):

scale services and patents.

(00:11:29):

Right.

(00:11:30):

And for that, a whole host of changes are necessary.

(00:11:34):

So then it kind of comes back to this big question of if you are able to create

(00:11:41):

these really high skilled people coming out of the schooling system and the

(00:11:46):

university system,

(00:11:47):

will you be able to transition to a great service economy?

(00:11:51):

And I'm going to put that question back to you,

(00:11:54):

but kind of argue two pieces there,

(00:11:57):

which,

(00:11:58):

you know,

(00:11:58):

I didn't find in Rohit and Raghu Rajan's book or in Dani's thinking.

(00:12:02):

One is,

(00:12:03):

look,

(00:12:03):

if you ask people,

(00:12:05):

and I think this is definitely true for India,

(00:12:07):

I think this is true for many countries in Africa,

(00:12:09):

what do you want from the government,

(00:12:11):

right?

(00:12:11):

They don't get upset.

(00:12:12):

Like, I've never talked to a parent, and I've talked to many parents, but

(00:12:16):

they don't get upset at the schooling system.

(00:12:18):

You ask them, hey, why is your kid not doing great?

(00:12:21):

They'll blame the kid.

(00:12:22):

It's like, oh, she doesn't study enough or he doesn't study enough.

(00:12:25):

They will almost never say, look, the teacher is a disaster.

(00:12:29):

They'll never say, oh, the schooling is a disaster.

(00:12:31):

They'll say, it's my kid, right?

(00:12:32):

Because they see some kids do well and they see some kids not do well and they're like,

(00:12:37):

oh,

(00:12:37):

that's the kid.

(00:12:38):

On the other hand, so when you ask them, what do you want from the government?

(00:12:42):

The number one priority is we need jobs.

(00:12:45):

Now, I don't know, and I'd love to hear from you and James on two things.

(00:12:50):

One is,

(00:12:50):

do you think we can shift or do you think it's even worth saying,

(00:12:55):

you know,

(00:12:56):

how does the government shift expectations from we want a job to we want our

(00:13:03):

schools and universities to function at a totally different level,

(00:13:06):

right?

(00:13:07):

Do you think politicians are willing to take the risk of saying,

(00:13:10):

hey,

(00:13:10):

if we give you really good schools,

(00:13:12):

but you don't get the jobs,

(00:13:15):

you will still re-elect us.

(00:13:17):

I don't know.

(00:13:17):

And I want to hear what you guys have to say about that.

(00:13:20):

And the second one,

(00:13:21):

Tobi,

(00:13:21):

that people are underestimating,

(00:13:23):

and I'm more and more sure in 20 years is going to become a major dynamic,

(00:13:27):

is that Europe is running out of people,

(00:13:30):

right?

(00:13:30):

I mean, the fertility rates are really low now.

(00:13:33):

At some stage, they're going to have to get over their racism and bring people in.

(00:13:38):

I don't know who these people coming in are, right?

(00:13:40):

A big proportion of them are going to be nurses, right?

(00:13:44):

nurses who are comfortable working with old people, right?

(00:13:48):

So we used to think exactly, as James said, export-led.

(00:13:51):

Now, Nigeria already exports a lot of doctors, right?

(00:13:54):

I mean, we know exactly how big that export industry has been.

(00:13:58):

But are we also thinking about a totally different scale of migration into Europe?

(00:14:05):

And what do those skills look like?

(00:14:09):

Because I think in 20 years,

(00:14:10):

this conversation we're going to have is going to take on a completely different tone.

(00:14:13):

Migration is going to be a big part of it.

(00:14:15):

You know, how our countries are sending people to other countries is going to be a big part of it.

(00:14:21):

And I don't know where that leads.

(00:14:22):

So let me put those two questions back to you and James.

(00:14:26):

I mean,

(00:14:26):

this one about are we willing to transition to politicians saying jobs are really

(00:14:31):

the private sector and you guys,

(00:14:33):

we are going to give you the skills.

(00:14:35):

And second,

(00:14:36):

Are we thinking hard about the fact that given how much European fertility is

(00:14:41):

declining and other countries' fertility is declining,

(00:14:45):

that they're going to need people for all kinds of jobs?

(00:14:49):

And is that something on the political horizon?

(00:14:52):

And I don't know the answers to these two things.

(00:14:54):

So let me tee that back to you as a question.

(00:14:58):

Tobi: I think James should go first.

(00:15:00):

James: You know, this is the trouble with having Jishnu on.

(00:15:02):

He's supposed to be answering the questions, but now he's asking a lot of the questions.

(00:15:06):

No, these are the most important questions I think facing certainly our field of development economics.

(00:15:12):

And so I think on the second question about

(00:15:15):

Does the government, is the government willing to change the offer, right?

(00:15:20):

The social contract, change the terms of the contract to say, look, you're on your own.

(00:15:26):

We'll give you the tools you need.

(00:15:28):

You know, I don't know.

(00:15:29):

But let me just say that from what I've observed in a number of places,

(00:15:32):

including even in northeastern Nigeria,

(00:15:34):

in Adamawa State,

(00:15:35):

where we started some work,

(00:15:36):

but then it got caught up in essentially kind of the impeachment of a governor

(00:15:40):

there a few years ago.

(00:15:41):

No, I think that it's extremely hard to change the terms of the contract.

(00:15:45):

I think that voters are thinking about their bottom lines.

(00:15:48):

They're not thinking about,

(00:15:49):

you know,

(00:15:50):

give me the tools and I will do the work myself to put food on my table.

(00:15:53):

So I'm not sure that's an easy thing to do.

(00:15:55):

And if I think about sort of

(00:15:57):

what a number of governments in East Africa essentially kind of doing,

(00:16:00):

at least in this domain,

(00:16:01):

you know,

(00:16:02):

I think they find themselves having to come up with all sorts of cash transfer and

(00:16:08):

other labor market support programs because ultimately it's not enough for them to say,

(00:16:12):

hey,

(00:16:12):

you know,

(00:16:13):

schooling is free because ultimately,

(00:16:15):

as Tobi said,

(00:16:16):

when you see those guys walking the streets,

(00:16:19):

it's not like they stop asking,

(00:16:20):

where is the job that I was promised?

(00:16:22):

I think this deep implicit promise is very, very hard to shift.

(00:16:25):

But to your second question, I'm curious what Tobi will have to say to this.

(00:16:29):

The second question on the global demographic structures and maybe the future of jobs,

(00:16:35):

and yes,

(00:16:35):

the Rodrik and Raghu and Rohit kind of claim that the manufacturing bus has left

(00:16:41):

the station.

(00:16:42):

First of all, I'm not entirely sure that I completely buy it, but of course, we're also in the age of

(00:16:47):

AI and more powerful machines that are essentially kind of around the corner.

(00:16:50):

So it is possible that maybe that bus has left the station.

(00:16:53):

And so maybe the future of,

(00:16:54):

you know,

(00:16:54):

the kinds of jobs that will create opportunities for this large group of young

(00:16:58):

people in Africa and in India is essentially kind of in the service sector.

(00:17:01):

And,

(00:17:02):

you know,

(00:17:02):

I already see some of that,

(00:17:04):

you know,

(00:17:04):

so in East Africa,

(00:17:05):

they're big migrant worker,

(00:17:07):

essentially kind of programs with the Middle East.

(00:17:09):

They are straddled with lots of problems around abuse and exploitation.

(00:17:14):

But I can tell you that if you get on a plane to Dubai or Qatar,

(00:17:19):

that in some ways many of the people that will be surrounding me will be a lot of

(00:17:23):

very young people going to work

(00:17:25):

Either essentially kind of inside people's homes or in some cases as baristas and construction workers.

(00:17:30):

So I think that's already started.

(00:17:32):

And in the places where it's politically, I guess, feasible to do.

(00:17:35):

I mean,

(00:17:36):

I think,

(00:17:36):

yes,

(00:17:37):

Europe,

(00:17:37):

Japan,

(00:17:38):

North America,

(00:17:39):

you know,

(00:17:39):

yeah,

(00:17:40):

I think those are places where in some ways the political barriers remain

(00:17:42):

quite strong.

(00:17:43):

But I do think that politicians are certainly looking at a lot of these programs.

(00:17:48):

I believe in Kenya just recently signed an agreement with Germany along these lines

(00:17:52):

of basically being able to essentially kind of having some guest worker programs.

(00:17:55):

So I think this is top of mind and it in some ways reflects perhaps the difficulty

(00:17:59):

of kind of changing this contract between voters and their governments.

(00:18:03):

Jishnu: Ah, super.

(00:18:03):

And I just wanted to add one more thing to this,

(00:18:05):

Tobi,

(00:18:06):

for your next question,

(00:18:07):

which is,

(00:18:08):

you know,

(00:18:08):

if you look at Kenyans,

(00:18:09):

Nigerians,

(00:18:10):

I suspect,

(00:18:11):

Indians,

(00:18:11):

I mean,

(00:18:12):

we are ingenious people,

(00:18:14):

right?

(00:18:15):

When I came to the US for my PhD, you know, they would teach that the US is a free market.

(00:18:19):

I was like, you guys have no idea what a free market is.

(00:18:22):

A free market is when,

(00:18:24):

you know,

(00:18:24):

there's a traffic jam and the bus breaks down and you have 30 vendors come to your

(00:18:28):

spot in five minutes.

(00:18:30):

Tobi: Yep,

Jishnu: right?

(00:18:31):

Selling everything under the sun.

(00:18:33):

That's a free market.

(00:18:35):

A free market is not having any clue what your tax is going to charge because

(00:18:38):

everyone's going to negotiate depending on whether it's raining,

(00:18:41):

where you're going,

(00:18:42):

what time of day it is,

(00:18:43):

right?

(00:18:44):

That's a free market.

(00:18:45):

And very fascinating,

(00:18:46):

you know,

(00:18:47):

Rem Koolhaas,

(00:18:48):

the architect,

(00:18:50):

he worked in Lagos for like eight years and they have this wonderful book called Lagos: How it Works.

(00:18:55):

And recently, well, not, I don't know, recently, a while back, I think, his co-author, Kunle Adeyemi

(00:19:01):

I hope I'm pronouncing it right.

(00:19:04):

And it's fascinating what they said.

(00:19:05):

They have a Guardian interview where they said,

(00:19:07):

look,

(00:19:07):

Lagos in 1997 was this fascinating city where the government wasn't there,

(00:19:12):

but still people created a lot of structures that allowed that city to function at

(00:19:17):

a fairly high level.

(00:19:18):

I don't know whether you agree with that.

(00:19:20):

I don't know Lagos at all.

(00:19:21):

And in that interview, you know, at that point, the state had really withdrawn from Lagos.

(00:19:26):

The city was left to its own devices, both in terms of money and services.

(00:19:31):

That, by definition, created an unbelievable proliferation of independent agency.

(00:19:36):

Each citizen needed to take in any day maybe 400 or 500 independent decisions on

(00:19:42):

how to survive in an extremely complex system.

(00:19:47):

That was why the title of the book became Lagos: How it Works,

(00:19:49):

because it was the ultimate dysfunctional city.

(00:19:52):

But actually, in terms of all the initiatives and ingenuities,

(00:19:56):

It mobilised an incredibly beautiful, almost utopian landscape of independence and agency.

(00:20:02):

At this point,

(00:20:03):

you know,

(00:20:04):

and James,

(00:20:04):

I don't know whether that social contract will be able to change it,

(00:20:07):

but the ingenuity of our populations is just through the roof.

(00:20:13):

So we have a sense of how to move it forward and thinking about what are the

(00:20:17):

guardrails we need,

(00:20:19):

right,

(00:20:19):

in this kind of new world that's coming up is,

(00:20:23):

I think,

(00:20:23):

the key question.

(00:20:24):

Tobi: Hmm.

(00:20:25):

Before I jump to my next question, I'm certainly not as skilled as you guys.

(00:20:31):

So my observations are just going to be a layman's observation, basically.

(00:20:37):

On Jishnu's point, first of all, Rodrik has to at least I’ve extended an invitation to him.

(00:20:46):

He has to clarify a lot of things with that new paper.

(00:20:49):

Because for years, he has been arguing the opposite.

(00:20:55):

When people point out that,

(00:20:58):

yeah,

(00:20:59):

a lot of low income countries are stuck in low productivity,

(00:21:03):

informal services jobs.

(00:21:04):

And, you know, perhaps the question should be how to make those productive.

(00:21:11):

I think Rodrik is one of the people that has been arguing that,

(00:21:14):

no,

(00:21:14):

you need manufacturing to really,

(00:21:16):

really,

(00:21:16):

you know,

(00:21:17):

do the structural transformation.

(00:21:19):

So I don't know why or if the evidence that he has now is sufficiently robust to

(00:21:25):

like shift really,

(00:21:27):

really big.

(00:21:28):

But I mean, for Rajan and… Rajan, for example, has been like pushing that view for a while.

(00:21:37):

I think I've heard a few speeches before that book.

(00:21:41):

especially on the construction question.

(00:21:43):

So I'll give you an example.

(00:21:44):

In Nigeria,

(00:21:45):

for example,

(00:21:46):

the two largest private employers are construction firms,

(00:21:52):

Julius Berger and the other Chinese company.

(00:21:55):

The third largest is a microcredit bank, right?

(00:21:59):

So I agree with Rajan that construction is something that might

(00:22:07):

provide that sort of soft landing in terms of large-scale employment creation that

(00:22:13):

manufacturing is for some countries.

(00:22:17):

But as for manufacturing bus leaving the station,

(00:22:22):

again,

(00:22:22):

I'm skeptical because if you look at what Bangladesh has been able to do,

(00:22:27):

yes,

(00:22:27):

they are struggling with diversification away from textile.

(00:22:32):

If you look at what Vietnam has been able to do,

(00:22:36):

on manufacturing, then you see that, okay, well, maybe there's still some hope there.

(00:22:44):

In my own view,

(00:22:45):

I think the challenge would be how democracies manage to create… low income

(00:22:54):

democracies manage to create a highly productive industrial sectors.

(00:23:00):

So, and I think all eyes will be on India for the next decade.

(00:23:05):

you know, how the attention, the investment and everything coming in now can create that

(00:23:13):

China-like story.

(00:23:15):

All eyes will be on India.

(00:23:16):

And if India manages to make that a success story,

(00:23:20):

I think it provides a good example for how other democracies will… where the social

(00:23:26):

contract provides a bit of tension,

(00:23:29):

like you said.

(00:23:30):

And I agree with James.

(00:23:31):

It's difficult.

(00:23:33):

Again, if I want to use Nigeria as an example, electoral politics right now is largely redistributive.

(00:23:42):

You know,

(00:23:42):

if you want to shift spending and public investment towards something with,

(00:23:48):

you know,

(00:23:49):

a little more delayed gratification,

(00:23:52):

I'm not sure that politicians are willing to take that risk.

(00:23:58):

And secondly,

(00:24:00):

I would say that even if you find a government that is willing to take that leap,

(00:24:05):

you're going to run into some serious fiscal challenges that you need to figure out.

(00:24:12):

Macroeconomically, a lot of our economies in Africa are challenged.

(00:24:17):

The debt burden is a huge, huge topic.

(00:24:21):

So the kind of financing necessary to improve your education sector,

(00:24:28):

I think a lot of governments look at that and they would rather spend a fraction of

(00:24:34):

that on cash transfer schemes and expanding

(00:24:39):

public employment, public sector jobs.

(00:24:43):

So if we are able to figure out the finance and the level of fiscal investment that

(00:24:51):

that is going to take,

(00:24:52):

that is a question mark that would need to be resolved,

(00:24:55):

which,

(00:24:56):

I don't know,

(00:24:57):

then leads me to my next question.

(00:24:59):

Again, on the quality of education, what are the low-hanging fruits that

(00:25:09):

are available.

(00:25:10):

If we are trying to, say, improve the quality.

(00:25:14):

You know,

(00:25:14):

like I said earlier,

(00:25:15):

you speak to a lot of employers,

(00:25:17):

they tell you that a lot of graduates,

(00:25:19):

yes,

(00:25:20):

they are schooled,

(00:25:21):

but they are not skilled enough.

(00:25:23):

They are poorly matched to the job they are applying for.

(00:25:28):

For example,

(00:25:29):

most of the people you find in the financial sector in Nigeria are people who

(00:25:35):

graduated from STEM subjects.

(00:25:39):

Mathematics students,

(00:25:40):

engineering students,

(00:25:42):

physics students,

(00:25:43):

chemistry students,

(00:25:44):

they come out of school and they go straight to the financial sector,

(00:25:48):

to the banking jobs,

(00:25:49):

investment banking,

(00:25:50):

advisory consulting.

(00:25:52):

And to be honest,

(00:25:55):

you can say that if you have a thriving STEM sector,

(00:25:59):

they will be poorly matched because they did not actually get that STEM education.

(00:26:06):

You know, I went through the Nigerian schooling system.

(00:26:09):

I can tell you how much practical, laboratory or experimental work I did.

(00:26:16):

Very little, you know.

(00:26:18):

So what are the low hanging fruits to improve the quality of education?

(00:26:25):

Because we seem to have gotten ourselves into,

(00:26:29):

to use a phrase I first learned from Lant,

(00:26:32):

isomorphic mimicry,

(00:26:34):

you know.

(00:26:34):

We have graduates,

(00:26:36):

we have tertiary institutions,

(00:26:37):

but the quality is certainly not the same across the world.

(00:26:43):

James: Let me give this a crack and then I'll let Jishnu polish up my response.

(00:26:46):

So I don't know that there are necessarily low-hanging fruit.

(00:26:49):

I mean,

(00:26:50):

in some ways,

(00:26:51):

I think the way to think about an education system is that the people who are

(00:26:54):

producing the outputs are also essentially kind of products of that education system.

(00:26:58):

And so,

(00:26:58):

yes,

(00:26:58):

I certainly think that if you want to improve the education system,

(00:27:01):

you have to start with the teachers.

(00:27:03):

And then you have to make it easy for the teachers to essentially kind of do their job.

(00:27:06):

And in a context of a historical and,

(00:27:08):

you know,

(00:27:09):

pretty unprecedented expansion of schooling,

(00:27:12):

you know,

(00:27:12):

over the last 50 years,

(00:27:13):

you know,

(00:27:13):

these school systems have expanded very,

(00:27:15):

very rapidly.

(00:27:16):

The curriculum that essentially kind of is being taught,

(00:27:18):

I mean,

(00:27:19):

you know,

(00:27:19):

when you were talking Tobi,

(00:27:20):

I thought,

(00:27:20):

OK,

(00:27:21):

you probably had the same curriculum that I went through,

(00:27:23):

which was,

(00:27:23):

I think,

(00:27:24):

in some ways quite challenging.

(00:27:25):

And if you went to a good school,

(00:27:27):

you had good teachers and you were surrounded by students who actually were well

(00:27:31):

prepared to learn.

(00:27:32):

But my sense is an expanding kind of school system cannot maintain the same degree

(00:27:37):

of difficulty of the curriculum.

(00:27:38):

Or even these things like,

(00:27:39):

you know,

(00:27:40):

the language of instruction is a language that nobody speaks at home.

(00:27:43):

And so the teachers might be struggling to teach in English or French or whatever language,

(00:27:48):

you know,

(00:27:48):

in many places.

(00:27:49):

Tanzania and Kenya may be in some ways a little bit different.

(00:27:52):

So I do think making it easy for teachers requires changing the curriculum and

(00:27:56):

making it easy for students to learn.

(00:27:57):

But,

(00:27:58):

you know,

(00:27:58):

also realising that teachers now deal with,

(00:28:01):

you know,

(00:28:01):

in Tanzania where I work,

(00:28:03):

the average class size for a first grader is on an order of 80 to 100 kids.

(00:28:07):

And teaching in that environment is not easy.

(00:28:10):

And so the low-hanging fruit, I think the low-hanging fruit, in fact, is not that low-hanging in my view.

(00:28:15):

It's really essentially kind of to have to invest a good deal more in early childhood

(00:28:19):

education and to really try and make it easy for that first grade teacher to

(00:28:23):

actually be able to give kids the skills they need.

(00:28:26):

There's a really nice paper,

(00:28:27):

and Jishnu can say a bit more about this,

(00:28:29):

that sort of looks at a panel of kids from four countries,

(00:28:32):

I think is Young Lives Data,

(00:28:33):

and compares Vietnam,

(00:28:35):

Chile,

(00:28:35):

and I believe India and Ethiopia.

(00:28:37):

And of course, you know, Vietnam is a high-performing education system.

(00:28:41):

But it suggests,

(00:28:41):

at least to some extent,

(00:28:43):

that much of that great performance actually comes from the fact that the kids at

(00:28:47):

age five are doing much,

(00:28:48):

much better in Vietnam than they are in the other countries.

(00:28:51):

And that if you condition essentially kind of where they start,

(00:28:54):

you know,

(00:28:54):

the trajectories don't look so,

(00:28:55):

so different but if you focus their starting at a much better level.

(00:28:58):

that in fact, they're going to learn much more.

(00:29:00):

That I don't consider a low-hanging fruit.

(00:29:02):

I actually think that's a pretty significant investment.

(00:29:05):

And I think a number of countries are starting to take this seriously,

(00:29:08):

which is to say,

(00:29:09):

should we expand the age range for which we publicly fund education,

(00:29:14):

say from age six,

(00:29:15):

and maybe even think about starting to fund education from age four?

(00:29:19):

Because I think it makes it much,

(00:29:20):

much easier to give kids the foundational skills that then make them,

(00:29:23):

I think,

(00:29:24):

much more productive workers.

(00:29:26):

So I don't think it's low-hanging fruit, but in fact, I think of these two things.

(00:29:29):

Start young and make it easy for the teachers to teach,

(00:29:32):

whether that includes changing the language of instruction,

(00:29:35):

whether it makes it easy for teachers to spend more time teaching kids the

(00:29:39):

foundational skills.

(00:29:40):

So don't make kids at age six learn five or six different subjects.

(00:29:44):

Maybe focus it on two or three.

(00:29:46):

I think all of those things for me are ways to make it easy to really give kids the

(00:29:50):

skills that they need to learn when they're 10,

(00:29:52):

12,

(00:29:52):

and 16.

(00:29:54):

Jishnu: I guess I'm confused about things a little bit, but I'll tell you where my confusion is.

(00:29:59):

So I've heard people say, you know, our education systems are not actually designed to build skills.

(00:30:05):

They're selection systems, you know, by which they mean.

(00:30:09):

We are remnants of the British systems.

(00:30:11):

And the idea was,

(00:30:13):

can we squeeze and squeeze and squeeze and see who's going to be a good person for

(00:30:17):

the British to take on or something?

(00:30:20):

I don't think they're a selection system at all,

(00:30:21):

because if they're a selection system,

(00:30:23):

then we should see that in every grade as we go up and up and up,

(00:30:28):

only certain kids are making it forward who are the best kids with the best test scores.

(00:30:32):

And that's not happening.

(00:30:34):

[No] Data showing that, you know.

(00:30:35):

There's just no evidence that the kids who are very smart are invested in a lot more in our system.

(00:30:43):

So I think one thing that I think is or not is actually sitting down and chatting

(00:30:49):

about what the hell do we want our education systems to look like.

(00:30:53):

And a good starting point is to say what kind of budgets are reasonable.

(00:30:57):

So, you know, I think this is right, right?

(00:30:59):

But the Nigerian education budget 2024 was what, about $2.2 billion or something?

(00:31:05):

Is that right?

(00:31:06):

Tobi: Yeah, something like that.

(00:31:07):

Yeah.

(00:31:08):

Jishnu: And I think Nigeria should have, what, about 35 million students.

(00:31:12):

You know, that's like $60 a student.

(00:31:15):

The place where I live in the U.S.,

(00:31:17):

which is called Montgomery County,

(00:31:20):

the public school system has about 160,000 students and a budget of 3 billion.

(00:31:27):

We might be just off the mark.

(00:31:30):

by hundreds and thousands of dollars in how much we're leaving on the table by not

(00:31:36):

investing in the education system.

(00:31:38):

So I think the biggest low-hanging fruit is the mistake that we have made.

(00:31:43):

I mean,

(00:31:43):

I think it's incumbent on us as researchers and profs and scholars to say,

(00:31:49):

give the politicians the damn numbers,

(00:31:52):

right?

(00:31:52):

We need to give them very clear numbers on if you manage to invest and improve the quality of schools,

(00:32:00):

then 15 years later, these are the wage returns you're going to see.

(00:32:05):

The mistake is ours.

(00:32:07):

The deficiency is ours because I am sure that if we were able to give them the

(00:32:12):

right numbers,

(00:32:12):

there would be a groundswell,

(00:32:15):

both among the politicians and among people to say we should be increasing our

(00:32:20):

education budgets not by 1,

(00:32:21):

2,

(00:32:21):

20%,

(00:32:21):

30%,

(00:32:21):

but by 6,000%,

(00:32:21):

right?

(00:32:26):

And hopefully,

(00:32:27):

you know,

(00:32:27):

in a couple of years,

(00:32:28):

at least from a few countries like these Young Lives or other places,

(00:32:30):

we'll have some of those numbers.

(00:32:32):

And I think we'll all be shocked at how big the returns could really be.

(00:32:38):

So I think the big low hanging fruit is to actually put the evidence and have that

(00:32:44):

discussion on what is it that we want our education system to do,

(00:32:48):

right?

(00:32:48):

And how much should we be investing in it?

(00:32:50):

And at what point?

(00:32:51):

And I think that discussion, including James's idea of how much should we invest in early childhood?

(00:32:56):

Do we want it to be a selection system or not?

(00:32:58):

Given our money, where can we go?

(00:33:01):

You know, how do we invest in the teachers, given that so many teachers are tenured?

(00:33:05):

Should we park some older teachers?

(00:33:07):

Getting some young guys who are teched up, know how to use the technology, the AI may change things.

(00:33:12):

You know,

(00:33:13):

all of these,

(00:33:14):

I think we need to have a forum where we are discussing it in our countries on a

(00:33:19):

regular monthly basis.

(00:33:21):

I think that's going to make a huge change moving forward.

(00:33:24):

And our big job is to give you the evidence to take that forward.

(00:33:28):

Great point.

(00:33:29):

I fully agree that there are high returns.

(00:33:31):

I'm not sure that I agree necessarily that people are not sharing this evidence.

(00:33:35):

You're right that in some ways I think the kind of evidence that is shared perhaps

(00:33:38):

is more short-term in nature,

(00:33:40):

right?

(00:33:40):

But I wonder whether in fact, and this is a question for you, Tobi.

(00:33:43):

Whether,

(00:33:44):

in fact,

(00:33:44):

the political system as it is and essentially kind of this,

(00:33:47):

you know,

(00:33:48):

electoral competition makes it very,

(00:33:50):

very difficult for any sort of policymaker to say,

(00:33:53):

I'm going to make this deep investment that pays off in 10 or 15 years.

(00:33:58):

And, you know, we will all be better off because of it.

(00:34:01):

And I hope to persuade the voters that they should essentially kind of,

(00:34:04):

you know,

(00:34:04):

carry this burden with me.

(00:34:06):

And, you know, things might not be great in the short run when I'm up for re-election.

(00:34:10):

But this is something we need to do.

(00:34:12):

I don't know the Nigeria numbers as well as I know the numbers in East Africa.

(00:34:16):

You know,

(00:34:16):

Nigeria's education still accounts for,

(00:34:18):

you know,

(00:34:19):

20 to 25 percent of the budget in many places.

(00:34:22):

And it's coming down because,

(00:34:24):

in fact,

(00:34:24):

there's actually now pressure from other sectors to say we need roads and we need

(00:34:28):

other kinds of investments.

(00:34:29):

But I get the sense that teacher,

(00:34:31):

you know,

(00:34:31):

enrolments are essentially kind of the largest category of worker they pay.

(00:34:35):

They spend a lot of their government resources on remunerating teachers.

(00:34:39):

I don't know that there is actually a lot of additional money around to really make

(00:34:44):

these big investments.

(00:34:45):

Sure,

(00:34:45):

they could go to the World Bank and other bilateral donors and say,

(00:34:49):

you know,

(00:34:49):

give us the billions we need to buy ed tech or do this big teacher training program.

(00:34:54):

I think they are in some ways, you know, quite constrained.

(00:34:57):

And I don't know that it's the evidence that's lacking as kind of the most binding constraint.

(00:35:02):

I think that the politics and the budget are more important, but I could be wrong.

(00:35:06):

Tobi: That's fantastic.

(00:35:09):

I still partially think that Jisnu is right.

(00:35:12):

And from my experience, so one example I'll give is I was at a conference two years ago.

(00:35:18):

And an outgoing state governor was on the panel.

(00:35:23):

And one of the things he said, which actually kind of resonated with me, was that we are politicians.

(00:35:32):

We don't know everything.

(00:35:34):

As a matter of fact,

(00:35:35):

he said that their knowledge is pretty limited and that the way the political

(00:35:40):

system… now,

(00:35:41):

it may as well just be describing Nigeria,

(00:35:43):

possibly.

(00:35:44):

The way the political system is,

(00:35:46):

is that when there is a knowledge vacuum,

(00:35:50):

other things tend to fill that,

(00:35:53):

which is a lot of political sycophants surround them.

(00:35:58):

And of course, lots of interests.

(00:36:00):

You know, I want you to give my cousin a job.

(00:36:03):

And these are political connections.

(00:36:06):

He basically said that within a short period of time,

(00:36:09):

they are surrounded in this bubble where almost no real actual knowledge about the

(00:36:16):

society they are making policy for penetrates that bubble.

(00:36:22):

For me, it certainly rings true.

(00:36:24):

And I'll tell you,

(00:36:25):

part of the reason why I started this podcast is to sort of create a connection

(00:36:30):

between policy and research,

(00:36:34):

you know,

(00:36:35):

with the politicians and the citizens as well.

(00:36:38):

Because if citizens are also quite well informed, they can ask the right questions.

(00:36:44):

So I think that while we are focused on

(00:36:47):

a lot on the incentive problem for our political system.

(00:36:51):

The knowledge problem is there, but it's not getting all the attention.

(00:36:57):

So you can have a senator or a House of Representatives member in Nigeria with as much as 50 to 70 aides.

(00:37:07):

And they are all media people.

(00:37:10):

There are no technical people on their staff.

(00:37:13):

People that can actually pass them briefing notes on

(00:37:17):

what policy is,

(00:37:19):

what the current evidence is,

(00:37:21):

what is the latest research on the particular committee that that rep member or

(00:37:28):

senator is chairing in the National Assembly.

(00:37:32):

So there's a disconnect

(00:37:34):

in how knowledge penetrates the political system, certainly.

(00:37:39):

And I don't know if it is researchers that can make a lot of difference here.

(00:37:43):

There are certainly a lot of other players,

(00:37:45):

stakeholders,

(00:37:46):

people in the non-governmental sector,

(00:37:47):

people like me,

(00:37:49):

media,

(00:37:49):

that can make a lot of contribution here to make sure that the evidence,

(00:37:54):

the numbers,

(00:37:55):

the knowledge really,

(00:37:56):

really rings and it's loud enough to get the attention of political players.

(00:38:03):

So that's my view.

(00:38:05):

Jishnu: I appreciate both sides of this debate

(00:38:08):

And I want to know whether,

(00:38:10):

you know,

(00:38:11):

I almost feel,

(00:38:12):

Tobi,

(00:38:12):

that we need to do some experiments like,

(00:38:15):

you know,

(00:38:15):

like if you put in aides who actually know the policy a little bit,

(00:38:20):

if we bring in some students and work with the governors and this kind of stuff on this,

(00:38:25):

will things start changing?

(00:38:27):

I'd love to get some answers to that because, frankly, you're right.

(00:38:32):

We need to get these answers down.

(00:38:34):

Tobi: Yeah.

(00:38:35):

James: So Tobi, a lot of these senators and governors, they are pretty sophisticated actors.

(00:38:40):

There's no shortage of very technical and experienced folks in Nigeria and outside

(00:38:45):

of Nigeria that these guys could talk to,

(00:38:47):

right?

(00:38:47):

And by the way,

(00:38:48):

I do agree with you that your podcast is a really powerful vehicle for connecting

(00:38:53):

ideas and policy and implementations.

(00:38:56):

This is an important avenue,

(00:38:57):

also because in some ways,

(00:38:58):

I think sometimes the ideas that researchers produce and other technical folks are

(00:39:02):

locked away in formats that are just generally not readily available to the kinds

(00:39:07):

of people who actually need them.

(00:39:08):

And so I think a conversation is a good way to essentially kind of get that started.

(00:39:11):

And I think even the pressure that will come from voters who listen to your podcast

(00:39:16):

is powerful.

(00:39:17):

Stefan Dercon has a book called,

(00:39:19):

you know,

(00:39:19):

I think,

(00:39:20):

Gambling on Development,

(00:39:21):

which is to say,

(00:39:22):

you know,

(00:39:22):

ideas in the abstract can be powerful ways of transforming systems.

(00:39:27):

But the actual work of actually translating ideas and implementing them is risky.

(00:39:33):

And so for a politician to take on these risks,

(00:39:35):

I don't think many are going to be willing to say,

(00:39:37):

I'm going to sink all my political capital in this big program.

(00:39:40):

It takes a long time, is uncertain, is subject to all sorts of other essential kind of shocks.

(00:39:45):

and fiscal risks and reversals and so on.

(00:39:48):

You know,

(00:39:48):

so that for me weighs a bit more heavily than he's a guy who wants to do great

(00:39:53):

things and is just casting around for ideas and they're just nothing to be found.

(00:39:57):

I think they meet with lots of technocrats and other people who tell them this and that,

(00:40:02):

but ultimately they have to think,

(00:40:04):

can I pull this off?

(00:40:05):

Can I do good and still essentially be successful as a politician?

(00:40:08):

And I think that calculus is still maybe as important as the landscape of ideas that they're exposed to.

(00:40:14):

Jishnu: Yeah, I mean, I don't know that much about politics and politicians.

(00:40:18):

I always have a hopeful view of the future and of our compatriots.

(00:40:23):

And I feel politicians should be creatures of our own creation.

(00:40:28):

And I've seen the democracy work,

(00:40:31):

you know,

(00:40:31):

and when we put democratic pressure and bring a coalition together,

(00:40:34):

it matters.

(00:40:35):

So I'm going to be the hopeful guy here.

(00:40:38):

Look, I think, Tobi, what you're doing is super important.

(00:40:41):

And I think as it starts to deepen and these kind of engagements deepen,

(00:40:45):

you know,

(00:40:45):

as long as we on our side are providing reasonable data,

(00:40:49):

evidence that you can have good discussions on the basis of,

(00:40:53):

maybe things will start evolving.

(00:40:56):

Tobi: So along the line of this conversation, I was thinking one curious question about health.

(00:41:03):

of generally what we call healthcare here.

(00:41:06):

Again, this might just be my imagination going wild.

(00:41:11):

So from an incentive point of view,

(00:41:15):

how much do you think that global public health interventions interferes with the

(00:41:23):

incentive to invest in healthcare locally?

(00:41:27):

So I'll give you an example.

(00:41:29):

Recently,

(00:41:30):

Bill Gates was in Nigeria a couple of weeks ago to talk about malnutrition,

(00:41:35):

which is now a very big problem,

(00:41:38):

particularly in northern Nigeria,

(00:41:40):

because in the last decade or so,

(00:41:43):

consistent with even previous years,

(00:41:46):

it's been one region of the country that is most ravaged by poverty,

(00:41:51):

lack of education,

(00:41:53):

a lot of violence and political instability,

(00:41:57):

and

(00:41:58):

Essentially, it's created this crisis.

(00:42:02):

The latest being malnutrition about one in four kids in northern Nigeria are now

(00:42:09):

chronically malnourished.

(00:42:12):

So recently,

(00:42:13):

Bill Gates was in the country to promote micronutrients and some form of technical

(00:42:20):

intervention that is supposed to make all the difference.

(00:42:23):

And

(00:42:24):

Yeah, of course, it's giving some money, about $600,000 for that initiative.

(00:42:30):

And,

(00:42:30):

I mean,

(00:42:31):

low-income countries like Nigeria are never short of such global public health interventions.

(00:42:38):

But at the same time,

(00:42:39):

I kind of worry how it interferes with the incentive,

(00:42:45):

again,

(00:42:45):

talking about politicians here,

(00:42:47):

to invest locally,

(00:42:50):

whether it is in primary health care or whatever.

(00:42:53):

So...

(00:42:54):

How does global public health interventions interfere with the incentive to invest locally?

(00:43:01):

Because there's always state neglect on some level when it comes to healthcare investment.

(00:43:07):

Jishnu: I think James will be a perfect person to answer that.

(00:43:13):

James: Let me take a crack.

(00:43:15):

I do think that the interaction of external actors in health can sometimes do more harm than good.

(00:43:23):

I've seen both sides of essentially kind of this,

(00:43:25):

where in some ways an external intervention doesn't really improve outcomes and in

(00:43:30):

some ways distorts a lot of the decisions that people are making.

(00:43:33):

But I've also seen it in many ways actually sort of bring attention to populations

(00:43:37):

that perhaps don't have the political clout to get the services they need,

(00:43:40):

right?

(00:43:40):

So I don't know that,

(00:43:42):

you know,

(00:43:42):

in some ways that we could conclude comfortably that in fact,

(00:43:45):

if these guys sort of stayed out of our business and

(00:43:48):

that, in fact, would make better decisions in the health sector.

(00:43:51):

In some ways,

(00:43:52):

I go back to environment where these systems are essentially kind of cash strapped

(00:43:56):

and they can't provide a lot of services to most of their populations.

(00:44:01):

And I think Jishnu has done quite a lot of work on this,

(00:44:02):

where in some ways,

(00:44:03):

a lot of these health systems in some ways have a big urban bias.

(00:44:06):

We spend more on hospitals and less on public health or primary health care.

(00:44:12):

In some ways,

(00:44:13):

I do think that sometimes the arrival of,

(00:44:15):

you know,

(00:44:16):

not Bill Gates per se,

(00:44:17):

but,

(00:44:17):

you know,

(00:44:17):

if I think about the other actors,

(00:44:19):

the WHO and other international actors,

(00:44:22):

I think they sometimes actually try and rebalance these programs to some extent.

(00:44:26):

But yeah, I think they can certainly do more harm than good.

(00:44:28):

I mean,

(00:44:28):

despite their maybe good intentions,

(00:44:31):

I certainly don't want to start any rumours that they don't have good intentions

(00:44:34):

because I think there's also a lot of discussions out on social media that suggest that,

(00:44:38):

in fact,

(00:44:38):

they are malevolent forces.

(00:44:40):

They actually don't mean well.

(00:44:42):

I think many times they mean well,

(00:44:43):

but there are sometimes unintended consequences of those interventions.

(00:44:46):

Jishnu: So, Tobi, here I'm going to go all Shakespearean on you.

(00:44:49):

And, you know,

the fault, Brutus, lies not in the stars, but in us.

(00:44:56):

In this case, at least, you know, in the following sense, right?

(00:44:59):

I mean,

(00:44:59):

I know that Bill Gates was in Africa and there's been a bunch of articles,

(00:45:03):

including in the Mail and Guardian and in other places,

(00:45:07):

talking about farmer Gates and what he's getting wrong.

(00:45:10):

And in Zambia,

(00:45:10):

for instance,

(00:45:11):

there's been this big concern that,

(00:45:12):

look,

(00:45:13):

Bill Gates really,

(00:45:14):

according to the Mail and Guardian,

(00:45:16):

Simon Allison writes that he really pushed monoculture.

(00:45:20):

And now the country's been in a massive drought and people are suffering.

(00:45:23):

And earlier, people used to plant many crops.

(00:45:26):

And that's been a standard problem ever since the British tried to introduce indigo

(00:45:30):

in West Bengal,

(00:45:31):

right,

(00:45:32):

from a long time ago.

(00:45:33):

Now, my point is the following, which is we are a democracy.

(00:45:38):

So Zambia,

(00:45:39):

Nigeria,

(00:45:40):

India,

(00:45:40):

you know,

(00:45:41):

we may argue about how effective we are,

(00:45:43):

but frankly,

(00:45:44):

we gave universal suffrage to our citizens long before we got rich.

(00:45:48):

And it has mattered.

(00:45:49):

It has made a difference.

(00:45:51):

So my question is the following.

(00:45:52):

We absolutely should not go down the line of saying,

(00:45:56):

oh,

(00:45:56):

we can do everything indigenously and we'll do everything in country.

(00:46:00):

And who are these foreigners to come?

(00:46:02):

No.

(00:46:02):

I mean,

(00:46:03):

if somebody has a good idea,

(00:46:04):

somebody has something interesting to say,

(00:46:06):

absolutely listen to them.

(00:46:07):

It sounds to me completely bizarre to say,

(00:46:10):

oh,

(00:46:10):

we'll not take penicillin,

(00:46:12):

even though it's been invented because it came from a foreigner.

(00:46:14):

No, ideas belong to humanity.

(00:46:16):

And we should celebrate ideas.

(00:46:18):

It doesn't matter to me where the idea came from.

(00:46:20):

If it's a good idea, let's use it.

(00:46:22):

Where I think we run into problems is when we say and when we allow rich people to

(00:46:30):

have privileged access to our political leaders.

(00:46:34):

I think that's the big problem, right?

(00:46:37):

And it's not just rich people.

(00:46:39):

You know, these guys are like super rich.

(00:46:40):

But frankly, we allow all kinds of people access to our political leaders outside the democratic system.

(00:46:46):

So Bill Gates wants to come and say,

(00:46:48):

you guys should be growing monocultural maize or whatever he's saying.

(00:46:50):

I'm not an agriculturist.

(00:46:51):

And I do know that,

(00:46:52):

you know,

(00:46:53):

there are huge differences in productivity between African farms and American farms.

(00:46:58):

You know, whatever he's saying, put it in a damn newspaper.

(00:47:01):

Get on your podcast.

(00:47:04):

Make the case to the public.

(00:47:06):

Tobi: Yep.

(00:47:07):

Jishnu: That I'm totally fine with.

(00:47:09):

And if you want to put your money behind your case, great, right?

(00:47:14):

Don't go and try and sell it to the cabinet or to a particular minister without

(00:47:20):

going through our democratic processes.

(00:47:22):

And we are the people who have to go to our politicians and say,

(00:47:25):

look,

(00:47:25):

what the hell are you doing while listening to this guy without going through our processes?

(00:47:29):

So I don't find it a question of

(00:47:33):

foreigner, foreign money, not foreign money.

(00:47:35):

I find it a problem when it becomes this idea that somebody can come in and whisper

(00:47:41):

in the ears of the finance minister.

(00:47:42):

I think that's totally anti-democratic.

(00:47:45):

And we have to fight tooth and nail to make sure that that's not happening.

(00:47:49):

James: But Tobi,

(00:47:50):

I guess to this point,

(00:47:52):

I fully agree that there should be a very transparent process of adjudicating ideas

(00:47:57):

and offers of support from outside.

(00:47:59):

But I guess in this case,

(00:48:00):

what is your concern with saying here's a very short term urgent intervention to

(00:48:06):

address malnutrition in the context?

(00:48:09):

And I don't know the context very well.

(00:48:10):

So please inform me where,

(00:48:12):

in fact,

(00:48:12):

you know,

(00:48:12):

states in northern Nigeria are really struggling to really intervene.

(00:48:16):

Like what is the distortion that is being created by the arrival of this idea and support?

(00:48:21):

Tobi: I do not really have a strong objection.

(00:48:25):

I don't even have a strong view.

(00:48:27):

It's just a question of curiosity because prior to some of these issues,

(00:48:34):

intervention or when the problems become serious enough to get some form of

(00:48:39):

international attention,

(00:48:42):

almost often,

(00:48:44):

at least I can speak for Nigeria to a certain degree,

(00:48:47):

there have been a long neglected advocacy or

(00:48:52):

noise that politicians or whoever makes decisions ignore, usually for years.

(00:49:01):

So malnutrition in Northern Nigeria,

(00:49:03):

I know so many local activists who are actively involved in Northern Nigeria who

(00:49:08):

have been making noise about this problem for a long time.

(00:49:12):

In some cases,

(00:49:13):

four or five years ago,

(00:49:14):

that this is what we are seeing on the ground and this will become a problem

(00:49:20):

Down the line, this is a disaster we tend to happen, you know.

(00:49:24):

And all of a sudden,

(00:49:25):

Bill Gates can fly in,

(00:49:26):

talk about micronutrients,

(00:49:28):

meet the president,

(00:49:29):

put some money,

(00:49:31):

you know,

(00:49:31):

and then it becomes a problem that commands urgency.

(00:49:35):

And,

(00:49:36):

you know,

(00:49:37):

again,

(00:49:37):

James,

(00:49:37):

I hear you on the question of resources,

(00:49:40):

but at the same time,

(00:49:42):

for example,

(00:49:43):

if you go to northern Nigeria and you see the way the political class,

(00:49:46):

state governors live,

(00:49:48):

Of course,

(00:49:49):

there is resource constraint,

(00:49:50):

but you can also say with some level of confidence that there is misallocation

(00:49:56):

going on.

(00:49:57):

If you don't even want to lean too hard on the corruption question,

(00:50:00):

which is,

(00:50:00):

you know,

(00:50:01):

perennial,

(00:50:02):

you know,

(00:50:02):

there is some form of misallocation going on.

(00:50:05):

So I just wonder, it's more of a curiosity for me.

(00:50:09):

I don't have a strong view, particularly.

(00:50:12):

James: But I think my response to this would be to say that in some ways that the

(00:50:15):

political process is not tuned to really reallocate resources in the way that you

(00:50:21):

and I think it should.

(00:50:22):

So ultimately, these activists who are organising and making a lot of noise, they're not being heard.

(00:50:28):

So one interpretation would be to say,

(00:50:29):

well,

(00:50:29):

Bill Gates comes in and has this idea and suddenly everybody thinks,

(00:50:32):

you know,

(00:50:32):

this is something you should be paying attention to.

(00:50:34):

That's one interpretation.

(00:50:35):

And yes, going back to Jishnu's point, I mean, you know, I think the power belongs to the people.

(00:50:40):

in Nigeria and not to wealthy and influential outsiders.

(00:50:43):

But I think another view is that the activists have actually sort of broken through

(00:50:47):

and that sometimes you might need this assist.

(00:50:50):

As much as,

(00:50:50):

you know,

(00:50:51):

it's undesirable,

(00:50:52):

I think we all wanted a system where we don't need outsiders to advocate on behalf

(00:50:56):

of the people on the ground.

(00:50:57):

But that's another view too,

(00:50:58):

which is to say that suddenly these people now have a champion who can actually get

(00:51:03):

the attention of the political class.

(00:51:05):

Tobi: Yeah.

(00:51:06):

Jishnu: Can I add one more thing?

(00:51:08):

Tobi: Yes, please.

(00:51:09):

Yes.

(00:51:09):

Jishnu: So it's worth going back and saying, OK, what was maybe it's worth going back.

(00:51:14):

I won't claim that it is,

(00:51:15):

but it might be worth going back and saying,

(00:51:18):

OK,

(00:51:18):

what did people write about,

(00:51:20):

say,

(00:51:20):

colonial medicine?

(00:51:21):

Right.

(00:51:22):

Which we know is a big, big part of what anthropologists and historians have looked at.

(00:51:26):

Right.

(00:51:27):

The person whose work I found most interesting in this is David Arnold,

(00:51:31):

and he has this book called Colonizing the Body on British medicine in India.

(00:51:35):

And he basically argues that,

(00:51:37):

look,

(00:51:37):

I mean,

(00:51:38):

there was a huge give and take happening between both systems that gradually got

(00:51:42):

transformed into kind of British ideas becoming,

(00:51:47):

you know,

(00:51:47):

the British starting to think that their idea should be widely used and whatnot.

(00:51:52):

And it met with massive resistance.

(00:51:54):

But the very interesting point he makes in the last chapter of his book is because

(00:51:59):

of various missteps they took,

(00:52:02):

the Indian group started mistrusting any advice that they gave,

(00:52:08):

thinking that all of their advice was coloured by,

(00:52:10):

you know,

(00:52:11):

colonial,

(00:52:12):

how do I get the labour kind of ideas,

(00:52:15):

right?

(00:52:16):

And as a result,

(00:52:17):

you know,

(00:52:17):

one of the most troubling things for me has been there were all these sanitation

(00:52:21):

commissions that were set up in India.

(00:52:23):

And there's very nice work that Guha has done,

(00:52:26):

that Harrison has done,

(00:52:28):

showing that when these sanitation systems were put into cantonments,

(00:52:32):

the mortality went down dramatically.

(00:52:33):

Right.

(00:52:34):

What's really interesting is they didn't make it out of the cantonments.

(00:52:38):

And part of the reason seems to me and David Arnold's book kind of talks about this,

(00:52:43):

is people really started mistrusting the Brits and saying,

(00:52:46):

look,

(00:52:46):

you're just doing this because of X,

(00:52:48):

which is self-serving.

(00:52:49):

And that's,

(00:52:50):

I think,

(00:52:51):

one big piece that we need to avoid,

(00:52:52):

which is we don't want to end up in a system where we are saying no to good ideas

(00:52:57):

coming from outside.

(00:52:59):

Because we think they are corrupt.

(00:53:01):

No, I think that's the big risk that we need to avoid.

(00:53:04):

And then on the flip side is how do we actually make sure that bad ideas don't come

(00:53:10):

through because they are actually being supported by money that is outside the system.

(00:53:15):

You know,

(00:53:16):

the World Trade Organisation has this idea of anti-dumping,

(00:53:18):

which is you can't just put products at highly subsidised prices in other countries.

(00:53:23):

It's this anti-dumping law.

(00:53:25):

I think we would have an anti-dumping law for bad ideas.

(00:53:28):

Tobi: That sounds interesting.

(00:53:31):

James: But as Tobi said earlier,

(00:53:32):

we need essentially kind of a pretty good constellation of actors to make judgments

(00:53:37):

on what's a good and bad idea.

(00:53:39):

Jishnu: Yep.

(00:53:39):

And I think that given how he described essentially kind of the people around a lot

(00:53:43):

of these decision makers,

(00:53:45):

I worry that that's actually sort of not trivial.

(00:53:48):

Jishnu: Yeah, and I think part of that, James, is we have to do it, right?

(00:53:51):

I mean,

(00:53:52):

yes,

(00:53:52):

we have to suck up to the fact that our funding gets in danger,

(00:53:55):

that we run into all kinds of issues when we take on these things.

(00:53:59):

But, you know, part of our job is all to say, sorry, man, that's a really bad idea. Like,

(00:54:04):

Gabriel Demombynes did that for,

(00:54:06):

you know,

(00:54:06):

Sachs when they had this article on their big push, millenium covering…

(00:54:10):

he said,

(00:54:10):

look,

(00:54:10):

the data is not there.

(00:54:11):

And they had a big fight and it turned out the data was not there.

(00:54:14):

So I think part of what we should be doing is taking that forward and saying when

(00:54:19):

it's a bad idea,

(00:54:20):

giving people the ammunition,

(00:54:21):

giving Tobi the ammunition,

(00:54:22):

giving others the ammunition to say,

(00:54:24):

sorry,

(00:54:24):

this is a bad idea.

(00:54:26):

Tobi: So, I mean, this has been a wonderful conversation beyond my expectations.

(00:54:31):

I just have a couple of questions left.

(00:54:33):

So I'll go back again to another piece you wrote, Jishnu,

(00:54:39):

which also quite literally lit a fire in my belly,

(00:54:43):

where you basically challenged your colleagues in the development economics subfield,

(00:54:50):

you know,

(00:54:51):

about some moral questions that they should be asking and are not.

(00:54:58):

I don't know why you chose to write that piece or what you saw,

(00:55:02):

but the way I'm going to phrase the question to both of you is like this.

(00:55:07):

I know that economics generally is going through some sort of empirical phase.

(00:55:15):

Do you think that that has been traded up for asking the big questions that I

(00:55:23):

certainly believe are still relevant,

(00:55:25):

which is

(00:55:27):

Essentially, for me, how does Nigeria double its average income in the next 10 years?

(00:55:35):

How does places essentially get out of poverty?

(00:55:41):

Do you think we've abandoned trying to find answers to those kinds of questions for

(00:55:48):

maybe what Lant has militantly called “kinky stuff?’

(00:55:55):

Jishnu: James has been going first, so.

(00:55:57):

James: No, no, no.

(00:55:58):

This is a question posed and motivated by your writing, Jishnu.

(00:56:03):

So you should go first.

(00:56:04):

Jishnu: I'm happy to take a first glance at this.

(00:56:06):

But, Tobi, you have to warn us even to, you know, completely put us over the wringer.

(00:56:11):

I mean, these are very difficult.

(00:56:13):

So two things, I think two things.

(00:56:15):

I was at the World Bank when there was this whole Spence report on what causes growth.

(00:56:19):

And they had this line,

(00:56:21):

if you go back to that,

(00:56:22):

they had this line saying,

(00:56:23):

if there was a magic bullet or if there was a specific set of policy recommendations,

(00:56:28):

we would have come up with it.

(00:56:29):

We spent a lot of time on this and there isn't, right?

(00:56:32):

And I think if you look at what Abhijit writes,

(00:56:34):

if you look at Esther's idea of the plumber,

(00:56:38):

the economist as plumber,

(00:56:39):

it's saying,

(00:56:40):

hey,

(00:56:41):

can we be modest and humble about where we are and what we know?

(00:56:45):

And the fact of the matter is we don't have a really good set of prescriptions for

(00:56:50):

what growth should look like.

(00:56:52):

But

(00:56:53):

By working on all these different issues, we do start to make progress on people's lives.

(00:57:01):

So if you think about the Millennium Development Goals,

(00:57:03):

I feel the biggest thing the MDGs did was it created a deliberative process to say

(00:57:09):

it's not only about growth.

(00:57:11):

We should care about the fact that fewer children are going to die.

(00:57:14):

We should care about infant mortality regardless of whether it affects growth.

(00:57:18):

And I completely agree with that viewpoint.

(00:57:21):

Then what our discipline does or is doing, look, it's always the case that there's a seesaw.

(00:57:28):

You know, we are always on a seesaw.

(00:57:31):

Right.

(00:57:32):

And one part of that seesaw is what's going on in the world.

(00:57:37):

And the second part of that seesaw is let's close off a lot of things,

(00:57:43):

otherwise we cannot make progress,

(00:57:45):

right?

(00:57:45):

Every discipline needs to build walls around itself because if you let too many

(00:57:50):

things in,

(00:57:51):

then you don't make progress,

(00:57:53):

right?

(00:57:54):

So around the early 2000s,

(00:57:56):

we really had a lot of work that said what's going on around the world,

(00:58:00):

right?

(00:58:00):

So we had, oh, lots of kids are in school, but they're not learning.

(00:58:03):

Look, people go to doctors and they don't get the right diagnosis.

(00:58:06):

Look, the teachers are absent.

(00:58:07):

Lots of stuff, right?

(00:58:09):

On a lot of different things.

(00:58:10):

And we've made,

(00:58:11):

I think,

(00:58:12):

tremendous progress over the last 15 years in saying,

(00:58:16):

hey,

(00:58:17):

on some things and less on others,

(00:58:18):

saying,

(00:58:18):

hey,

(00:58:19):

these were great pieces on what's going on around the world.

(00:58:22):

Let's now put that wall around it and make progress on these issues.

(00:58:26):

And some places we've made a lot of progress, others less so.

(00:58:31):

I feel that now that we had the seesaw that said the real world, make progress by building walls,

(00:58:38):

Now I think we need to push that seesaw back.

(00:58:41):

So it's not necessarily the type of work that we're doing.

(00:58:45):

It's more within the disciplinary core because you always need both types of work.

(00:58:51):

It's within the disciplinary core.

(00:58:53):

Which one do you privilege?

(00:58:55):

So I think it's time to go back to saying we need to privilege the basic work that

(00:59:01):

starts re-examining the world and saying 20,

(00:59:04):

25 years later,

(00:59:06):

what are people's lives like?

(00:59:08):

And I'll give you one example.

(00:59:09):

Right.

(00:59:09):

I was in Delhi over the summer and it struck me,

(00:59:12):

you know,

(00:59:13):

so many of our cities because of climate change are now on the verge of being unlivable.

(00:59:20):

Right.

(00:59:20):

If you look at a place like Delhi,

(00:59:22):

you know,

(00:59:23):

January pollution levels that are at 500,

(00:59:26):

600 on the P2 at 2.5.

(00:59:27):

Right.

(00:59:27):

It's unlivable.

(00:59:31):

February, same thing.

(00:59:32):

March is kind of OK.

(00:59:34):

April starting to get hot.

(00:59:35):

May, 52 degrees.

(00:59:37):

June, 50 degrees.

(00:59:38):

Heat stroke through the roof.

(00:59:40):

July, humidity, wet bulb thermometers above what is livable.

(00:59:44):

August, same thing.

(00:59:45):

October, kind of livable.

(00:59:47):

November, the pollution is back.

(00:59:48):

You put it together and you say, how is a poor person going to live in this damn city?

(00:59:54):

And somebody who can put that together,

(00:59:56):

somebody who can start to say,

(00:59:58):

OK,

(00:59:59):

here's how I want you to think about the year and climate change.

(01:00:02):

That kind of stuff we solely need now.

(01:00:05):

And I think we are almost there.

(01:00:07):

So it's not a question of fighting the discipline.

(01:00:09):

It's saying what part of the discipline should at this point get the emphasis?

(01:00:15):

And I think that, you know, it's going to move.

(01:00:17):

It has to move.

(01:00:18):

It has to move.

(01:00:19):

There's just no two ways around it.

(01:00:21):

James: So let me just add a few comments on,

(01:00:23):

you know,

(01:00:23):

maybe going back to Tobi's question,

(01:00:25):

like where is the advice about how can we get Nigeria to double its income over the

(01:00:30):

next 10 years or so?

(01:00:31):

And there's a really nice characterisation of the two kinds of development economists.

(01:00:36):

And I will not name the person who has shared this characterisation.

(01:00:40):

But there's a small ‘d’ development economist and there's the big ‘D’ development economist.

(01:00:45):

And I think historically,

(01:00:46):

if you think about the big push ideas of the 60s and 70s,

(01:00:49):

or even essentially kind of the Washington consensus in the 90s,

(01:00:53):

I think much of that advice was really about the big D development economists.

(01:00:57):

And maybe the conclusion there, you know, at least it has been going back to sort of the Spence report.

(01:01:03):

Maybe we just don't really have, you know, a very clear set of guidelines.

(01:01:07):

We thought we did, right?

(01:01:09):

We thought we did, you know, reduce your fertility, make markets work.

(01:01:13):

It doesn't seem to kind of produce the benefits, I think, that we would like to think.

(01:01:17):

And, you know, Dani Rodrik has a book, I think, I wish it were more accessible to the general public.

(01:01:22):

You know,

(01:01:22):

we have one economics,

(01:01:23):

but many recipes,

(01:01:25):

which is to say the solution for Nigeria might be very Nigeria specific.

(01:01:29):

It might require essentially kind of a very untraditional path,

(01:01:33):

which is not coming out of a 10 point or 20 point economic plan.

(01:01:37):

But my sense is that, you know, what's happened perhaps to the field is

(01:01:41):

is maybe being honest with ourselves that we don't have all of the answers,

(01:01:47):

at least for essentially kind of the big question that you asked,

(01:01:49):

Tobi,

(01:01:49):

that that answer is not going to come in a nice big report.

(01:01:53):

That that answer,

(01:01:53):

in fact,

(01:01:54):

is a process of,

(01:01:56):

you know,

(01:01:56):

trying a bunch of things,

(01:01:58):

establishing,

(01:01:59):

you know,

(01:01:59):

maybe let's go back to Dani's idea.

(01:02:01):

Like, let's do industrial policy, but let's try and do it well.

(01:02:04):

And we're going to fail.

(01:02:05):

And maybe we might discover one or two great ideas where Nigeria can be quite successful, right?

(01:02:11):

But that's in some ways kind of saying,

(01:02:13):

rather than,

(01:02:14):

you know,

(01:02:14):

do this and this will happen,

(01:02:16):

this is basically,

(01:02:16):

you know,

(01:02:17):

establish,

(01:02:18):

and this is… Jishnu will like this,

(01:02:19):

establish a process for discovering essentially kind of good and bad ideas.

(01:02:24):

And maybe that's essentially kind of the way forward.

(01:02:26):

I'm not going to give you a guarantee that you'll be successful.

(01:02:29):

But in fact, this process will essentially kind of at least help you shut down bad ideas.

(01:02:33):

There's nothing wrong with actually sort of disinvesting in essentially kind of

(01:02:36):

things that are not working in general.

(01:02:38):

And then I think the other part of this,

(01:02:39):

for the small ‘d’ development economists,

(01:02:42):

I certainly sort of think I'm in that category,

(01:02:44):

is what can you do today,

(01:02:46):

right?

(01:02:46):

So maybe there are the big questions about sort of growth over sort of the next 10 years.

(01:02:51):

But I think it's important to also try and improve the outcomes of people today, right?

(01:02:56):

And so I do think that there should be room under the umbrella for both types of economists.

(01:03:01):

But yeah, I certainly think that there's been a shift.

(01:03:03):

Like in order to make space for the small ‘d’ development economists,

(01:03:06):

I think the big ‘D’ development economists in some ways have had to take a backseat.

(01:03:10):

And, you know, it might be a good time, as Jishnu says, to bring them back to the front of the class.

(01:03:14):

Tobi: Final question for both of you.

(01:03:18):

So this is a bit of a tradition on the podcast.

(01:03:21):

What is the one idea?

(01:03:22):

It may be something you're working on, maybe someone else's idea.

(01:03:27):

Can be anything.

(01:03:29):

But what is that one idea that you would like to see spread everywhere,

(01:03:35):

have a lot more influence,

(01:03:37):

have a lot more people believe in?

(01:03:40):

What is that one idea?

(01:03:42):

I'll start with James.

(01:03:44):

James: Put it this way,

(01:03:45):

you ask this question at a really challenging time where in some ways there's more

(01:03:49):

dark clouds on the horizon and maybe,

(01:03:51):

you know,

(01:03:52):

less room to be very optimistic.

(01:03:55):

But let me just say that I think, you know, this might not be a completely original idea.

(01:04:01):

We need to rethink what investment in any infrastructure means today.

(01:04:08):

I certainly think that markets are ultimately at the centre of driving a lot of

(01:04:12):

progress and prosperity and markets work well when people are very well connected.

(01:04:16):

And we are pretty well connected in terms of communications infrastructure,

(01:04:20):

but we're not as well connected on the hard infrastructure.

(01:04:23):

If I think about the prospects that are happening in the parts of the world that I

(01:04:27):

do work in,

(01:04:28):

I worry that,

(01:04:29):

you know,

(01:04:29):

Jishnu was talking about temperature and pollution.

(01:04:33):

I'm worried also about, you know, whether we have

(01:04:36):

roads that are climate proof, whether we'll have schools and hospitals that are climate proof.

(01:04:43):

And while essentially kind of this idea in some ways raises the cost of doing

(01:04:46):

business in general,

(01:04:47):

that I think we really need to start thinking about how we can climate proof the

(01:04:52):

infrastructure we have and what we already have.

(01:04:54):

And so,

(01:04:55):

you know,

(01:04:55):

I don't think this is wildly kind of original,

(01:04:58):

but I just finished doing some work in Rwanda and

(01:05:02):

a big chunk of that work is affected on every rainy season where roads get washed away.

(01:05:08):

And, you know, communities are essentially going to cut off for a long time.

(01:05:11):

And,

(01:05:11):

you know,

(01:05:11):

we're certainly seeing this around the world,

(01:05:12):

not just in East Africa,

(01:05:14):

in Nepal and in North Carolina,

(01:05:16):

you know,

(01:05:16):

not far from here.

(01:05:17):

And so my concern is that we need to start preparing for a world in which life is

(01:05:21):

going to be much more challenging.

(01:05:23):

Tobi: Your turn, Jishnu.

(01:05:25):

Jishnu: You know, so a while back, I had this conversation with this politician, right?

(01:05:29):

And he said,

(01:05:30):

look,

(01:05:30):

around the early 90s,

(01:05:32):

you know,

(01:05:32):

all of you guys said,

(01:05:34):

bring in the market,

(01:05:35):

start to liberalise and everything will improve for everybody.

(01:05:39):

And he said,

(01:05:39):

basically,

(01:05:40):

what I've seen is that things have improved massively for very rich people,

(01:05:44):

but the poor are still where they are.

(01:05:46):

And in fact, they would be much worse off if the government was not doing all kinds of things.

(01:05:49):

And I think that's roughly right, right?

(01:05:52):

So, you know, I want to go back and say, look,

(01:05:55):

I think we are at times, exactly as James said, that are very challenging.

(01:06:01):

And one more thing which is worth emphasising and worth remembering is we are at a

(01:06:07):

time of exceptional,

(01:06:09):

I don't know whether it's exceptional,

(01:06:10):

but we are at a time of massive change,

(01:06:13):

right?

(01:06:14):

And I think what we keep doing as policymakers and economists is we keep saying, do this, do that.

(01:06:21):

And I think we need to start thinking seriously about what kind of robust processes

(01:06:28):

do we need to put in place so that our populations have,

(01:06:32):

you know,

(01:06:33):

serious democratic and deliberative discussion about what they want to do,

(01:06:37):

where they want to go next.

(01:06:39):

Right.

(01:06:41):

So it could well be that our democratic discussions and all of that throws up,

(01:06:47):

hey,

(01:06:47):

we want Nigerian incomes to double over the next 10 years.

(01:06:52):

But it could also be,

(01:06:53):

Tobi,

(01:06:53):

that that conversation throws up,

(01:06:56):

I'm fine with our incomes going,

(01:06:58):

I'm not fine with it doubling,

(01:07:00):

if what it means is that the rich are now 30 times richer and the poor are 5% richer.

(01:07:07):

which is what, you know, we measure it as doubling.

(01:07:09):

But look, I mean, if you look at India, you look at the US, you know, what was the thing?

(01:07:13):

Real wages haven't changed since 1980, 1985 for the poor, right?

(01:07:18):

I mean, that's crazy to me, right?

(01:07:21):

I mean,

(01:07:21):

a lot of the growth in incomes that we're seeing in India is coming from some rich

(01:07:25):

people basically exploiting the environment.

(01:07:27):

So I want to say, how do you, me, how do all of us work on saying

(01:07:33):

What's the process that we need to have robust conversations about who we want to

(01:07:39):

be and where we want to be 20 years,

(01:07:41):

10 years from now?

(01:07:43):

Do we want to be working like crazy and have more money?

(01:07:46):

Great.

(01:07:47):

Or do we want that medicines are available to everyone?

(01:07:50):

That's also great.

(01:07:52):

We should not stick to an ideological position of markets are good regardless of what they do.

(01:07:58):

We have to stick to this is who we want to be.

(01:08:01):

And if the markets are not working or something else is not working, let's change it.

(01:08:05):

So if there's one idea I want people to take away,

(01:08:07):

look,

(01:08:07):

the power really is in us and we need to get together and say,

(01:08:12):

what are the processes that we want to live by that makes at least our kids have a

(01:08:16):

much better lives than we?

(01:08:19):

You know, that's our aspiration as all parents is that our kids have a better lives than we did, right?

(01:08:24):

And I would urge that we start thinking about what processes do we need to put in

(01:08:28):

place to navigate us through these difficult times.

(01:08:32):

Tobi: Thank you very much to both of you. It's been fantastic having this conversation.

James: Thank you so much, Tobi. Thanks for having us on and for grilling us with these really challenging questions.

Jishnu: Oh, my goodness. I feel like we've been put through the ringer on this one. No, Tobi, this was really a pleasure.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

In this episode of Ideas Untrapped, I sit down with economist Oliver Kim to explore the complexities of African economic growth and the challenges surrounding industrialisation. We discuss why Africa has struggled to replicate the manufacturing successes of East Asia, touching on issues such as labour costs, political economy, and the global market environment. Oliver also shares his thoughts on the importance of state capacity and regional integration and how to rethink GDP statistics in development research. Oliver Kim is an economic historian and a research fellow at Open Philanthropy. He also writes excellent blog Global Developments.

Transcript

Tobi:Welcome, Oliver, to the show. I've been a fan for a while, and it's fantastic talking to you. So thank you so much for coming on Ideas Untrapped.

My first question to you involves something you wrote a couple of months ago where you talked about African prices, which is always a puzzle that I've been interested in. So, to restate it as simply as possible, we know that manufacturing in Africa has not grown as much, at least relative to other sub-regions in the world. And there are some theories or findings that suggest that it’s because labour cost is too high. And there's a bit of back and forth in the debates about how unique that is to Africa as a continent. So can you shed more light [on that]?

Because you see a lot of comparisons, maybe Ethiopia and Bangladesh…the unit labour cost and how high it is. So, is that really the constraints? What are the nuances based on what you discussed in that blogpost?

Oliver:Yeah. Just to quickly summarise. Africa has kind of missed out on the manufacturing revolution that, for instance, propelled East Asia…so when you think of the East Asian tigers, China, to rapid rates of growth and poverty alleviation. And, i think in some countries, actually, the share of manufacturing value-added or the share of manufacturing employment is the same or lower than where it was in the 1970s immediately after independence. So, from a developmental standpoint, this is a bit of a puzzle and from a poverty alleviation standpoint, it's a tragedy because this is the only sort of way that we know how to lift large numbers of people out of poverty in a rapid sort of fashion. That’s how China did it; that's how earlier, Korea, Taiwan, and Japan did it.

From a prices standpoint, the problem that economists have identified is that labour costs are too high relative to the level of productivity. That's an important qualified statement to make. So most developing countries are poor [and] as a feature of a developing country, one thing that's true is that incomes are relatively low, wages are relatively low, and so labour is relatively cheap. It's also true that if you're a foreign firm deciding where to site a factory, you don't just care about the labour cost. You also care about the productivity of the workforce. And so it works out that what you care about is like the amount of productivity divided by the cost of hiring additional worker.

And on that metric, which is typically measured in something that's called a unit labour cost (the amount that it costs to produce one unit of output), a lot of sub-Saharan African countries turn out looking relatively poor, especially compared to their peers [at] similar sort of income levels.

So there's sort of two dimensions of this problem. One is the productivity side, and then the other is the cost side. On average, it appears basically that African countries have wages that are actually relatively high for their level of development. And so this becomes a further mystery, like why is this the case? One hypothesis that's been put forward in a couple of papers by the folks at the Center for Global Development is that it's because prices are too high. So this is like one step up the causal chain. If prices are high and the goods and services that are to buy cost too much, then you have to pay people a higher wage basically to afford that.

Of course, the sort of factors behind this, I think, are incredibly complex. I think one major, sort of, historical and fundamental feature that I would point to is that historically labour in Africa, sub-Saharan Africa has been relatively scarce. So this is the contrast I guess, with East Asia and potentially South Asia, where population density is incredibly high and labour is constantly in surplus.

So historically, you know, China, East Asia is like one of the most densely populated regions of the world. The opposite is kind of true in Africa. Now the population has grown a lot, but historically you just had actually a lot more land than people. And if you look at the deep history of African sort of polities, a lot of them were trying to economise more on people than on land. So like in East Asia and Western Europe, you know, you had states with very clearly defined boundaries and political control was defined by control over land.

In Africa, there are states, but there are also instances basically where political control was defined more by control over people. And so there was more fluidity in terms of like territorial boundaries. And so control basically of labour, potentially through slavery also, was a way of a political state to assert power. That's a bit of a digression, but historically speaking, you had relatively low population density. I think that's part of the factor into capitalism. why labour was relatively scarce and maybe why wages are low. So in the present day, maybe that's starting to change a little bit. But looking at the sort of deep fundamental factors, it appears that maybe wages are potentially, quote unquote, “too high to enable a sort of African manufacturing revolution.”

Tobi:Yeah, maybe I read that wrong. But one of the things you discussed in that particular essay was the Assam non-linear model or something like that. It was a U-shaped relationship between GDP and price levels, which, again, maybe I'm wrong about this, the conclusion that sort of came out of that, that this might not necessarily be a problem that is unique to Africa. So can you shed more light on that?

Oliver:Yeah. So let me talk about what I talked about in the blog post. So economists have this relationship. It's a purely like empirical one. So if you go out in the world and you observe things, it's called the Balassa-Samuelson relationship, where basically it appears that as countries get richer, prices of things like haircuts and services seem to go up almost more than proportionally, right?

So like, you know, if I go to Switzerland, which is a very rich country, a haircut costs like $30 or something, something ridiculous. Actually, it's probably more than that. It's like $50 or something, 50 Swiss francs versus, you know, if I go to a Kenyosi in Kenya or whatever to go to a barber, that same haircut, which effectively is not that differentiated in terms of quality. Like a haircut is a haircut. Like if I ask for a buzz cut, it's the same thing. It's the same product, but that product in Kenya probably costs a dollar or possibly less. And so this sort of weird differential where richer places seem to have higher prices is known as the Balassa-Samuelson effect. And if you think about like the sort of underlying theoretical mechanism here, basically richer countries have higher productivity. Higher productivity shows up in like higher productivity in let's say like the manufacturing sector or higher tech kind of sectors.

For like service sectors, which everybody needs, right? So everybody needs like barbers, everybody needs janitors, teachers, things that basically don't increase that much in productivity. Even these sectors need to face higher wages in these rich countries in order for them to be able to compete with the manufacturing sector where productivity has gone up a lot, right?

So like people can switch jobs, people can move between different sectors of the economy. And so the price basically of these service sector goods where productivity actually hasn't gone up that much have to sort of keep pace.

And that's how you end up with this phenomenon where - the same haircut, essentially the same quality, costs the same amount across two places with very different incomes. Now, the way that economists typically have thought about this is that there's a linear relationship. So if you drew like a scatterplot of countries by their income levels and their price levels, you'd just get something like a line. That's like the theorised kind of relationship, a linear Balassa-Samuelson relationship. By that logic, if you put African countries on that scatterplot, it looks like basically that their prices are too high.

So they're lying above this line on the scatterplot between GDP and price levels. What I was arguing in this piece is there's some research, in particular a paper from the Journal of International Economics by Hassan, I forget his first name, I think from like 2017 or so, basically arguing that maybe this Balassa-Samuelson relationship is not actually linear. Maybe it's actually nonlinear, right? There's no actually like really strong reason that this thing has to be linear. It's just like it's the easiest model to write down.

And this is like a common flaw amongst economists is that you go with the first thing that's like easiest mathematically to do. And then you forget that it's just a simplification and you start to treat it like a feature of reality. But so he writes out a more complicated model where, you know, as is true in the real world, there's not just like a service sector and a non-service sector, as I laid out just a minute ago. There's agriculture, there's manufacturing, there's services. Countries basically shift between these three things as they vary in their stages of development, right?

Agriculture for a lot of developing countries is actually mostly non-traded. Think of subsistence farmers, people who grow maize or soybeans for their own consumption. And so it's not the same as a big agricultural producer in Europe or whatever that's just trying to sell to the entire world. And so you can think of those agricultural products as more like the services, like those haircuts that I was describing in like a European country. And so it works out if you do the math and you account for basically the movement of labour between these different sectors as an economy develops, you end up with something that looks more like a non-linear Balassa-Samuelson relationship, like a U-shape, right?

So prices may start to go down a little bit as you move from a low level of income to like a medium level of income. And then they start to go up again. And so accounting for this kind of nonlinear Balassa-Samuelson relationship, maybe sub-Saharan African countries don't look like so much of an outlier in a global sense. Maybe this is actually just like a general sort of pattern of development that all countries have gone through, where their prices have started to go down a little bit and then gone up. And so maybe prices are not the reason that African manufacturing has sort of lagged behind.

Tobi:One thing I'm curious about, which I would like you to speculate on a little bit, is how this all relates to food prices. I know that maybe Tom Westland has done a little bit of work here on food prices and divergence in Africa. It's hard to generalise for the entire continent, like you said, but for example, in Nigeria, food inflation is currently 40%. It's been double digits for about a decade. If you further break that down into what, actually, households spend money on, it's mostly food, right? So, like, we have these higher prices, which then feeds into higher wages. What is the relationship to the sort of inability of some African economies to achieve agricultural productivity enough to bring down food prices?

Oliver:Yeah, so this is an incredibly complex issue. I think it plugs into the political economy of a lot of sub-Saharan African states. So the most famous book on this kind of subject is Robert Bates's Markets and States in Tropical Africa. And it's a very slim book, but I think it's a remarkably powerful set of analytic tools for thinking about this stuff. So let's take a step back. Most developing countries, not even just African countries, but most developing countries, what do they have to produce? They have agriculture, right? [In] Most developing countries, most people are farmers.

And immediately after independence, again, not just African countries, but countries in South Asia, countries in East Asia, All of them, they achieved their independence and they started to figure out like, what can we potentially do to start growing? And what sector do you basically have in order to finance development? If you want to import machines, you want to like, you know, foster manufacturing growth. The only sector that you have is basically agriculture, right? And so there's this strong impulse basically to essentially tax agriculture to finance the capital imports and things that you need to foster manufacturing growth.

There's actually a lot of pressure basically to lower the prices that are paid to agricultural producers to finance imports of machines and stuff from richer countries. This process happened not just in sub-Saharan Africa, but again, like in Taiwan and Korea, where basically the state imposed policies that actually had an anti-agricultural bias.

The difference, I think, that Bates argues is that these policies became much more entrenched in sub-Saharan Africa, where basically the state had a lot less sort of penetration into the countryside, where the state was not as beholden, I guess, to the needs and interests of farmers, for instance. And the state basically became captured in the large sense by urban elites who discovered basically that they liked having prices, particularly of food, which as you mentioned [that] for a developing country is the largest portion of the consumption basket, in a lot of places.

And in a trade sense, they also liked having relatively cheap imports from other countries. So for the growing African middle class [and] for the elites, you know, they liked imports of European cars and luxury goods and that kind of stuff. And so that favours an exchange rate that tends to be overvalued to make your imports cheaper. And that actually hurts farmers who are interested potentially in exporting for whom an undervalued exchange rate would actually be the pro-developmental policy.

This is maybe one point of divergence between East Asia and a lot of countries in Sub-Saharan Africa, where, you know, you started from a very similar kind of logic, which is that you should try and take resources, pull resources out of agriculture to fund manufacturing growth so that you can have your own sort of industrial revolution. But those sort of policies that effectively tax agriculture and made it cheaper basically for urban consumers, became entrenched in places like Nigeria and Kenya because the political class and the governing elite became beholden to them in a way that was not true in East Asia. So that was kind of a tangent from your original question, but I think the political economy aspects are worth highlighting here.

Oliver:You’ve mentioned You've mentioned East Asia a couple of times in your answers. It's become the model, the standard when we talk about the economic development. I was telling a friend recently that ever I was telling a friend recently that ever since East Asia, the East Asia phenomenon, basically every country has been trying to make a miracle in terms of development. I mean, 2-3% rate of growth no longer suffices. You have to do 7-10%, at least since China. What was so unique about those set of states Japan, Taiwan ,Korea, Singapore to a lesser extent, Hong Kong? What was so unique about them and that time period that made it possible? Because essentially, i would say, that no country has been able to repeat that level of convergence since .

Oliver:Yeah, unless you happen to be lucky enough to find yourself sitting on a gigantic oil field. Though I guess it's also true that that's not even necessarily good for development. There's a couple of factors that I'd highlight. So the first, I guess, is historical stuff. So East Asia, in some sense, is unusual like Western Europe, in that it has a long history of being organised along state lines. In some senses, like Korea, Japan... and certainly China, these are polities that emerged before the emergence of states in Western Europe. And there's been a lot of research actually trying to understand how these states emerged without a lot of the same interstate warfare that characterised Europe in the medieval and the early modern period, but instead through a process of Confucian learning, of an elite that was based around meritocratic civil service kind of stuff.

Historically, this place is like a little bit unique. And it's unlike, let's say, a lot of Sub-Saharan Africa, where at the time of European colonisation, around 50% of the people were living in sort of polities organised as states. That's not a statement about like, oh, states are better or more developed in any sense. But for the specific problem of if we want to do things like industrial policy or like agricultural policy, get growth to happen, it turns out that having things organised as a state turns out to be a very effective sort of organisational form. Again, to go into the deep history of that a little bit more is this was a rational sort of response by people who were living in Africa at the time, in part because of the relatively low population density. The places actually where you see the emergence of states in Africa around like the Great Lakes region, for instance, or the Ethiopian highlands are places where you had relatively higher population density. So in that sense, it tracks basically the broader sort of global pattern.

Anyway, that's a long digression to say that East Asia is kind of unique in having relatively well-defined strong states. And that kind of already solves a lot of the problems that I think a lot of sub-Saharan African countries are facing, where, you know, essentially a lot of them are creations of European colonialists. You have a whole bunch of people from different tribes, different ethnic backgrounds who don't actually have a whole lot to do with each other and they're lumped together in states that just kind of lack coherence. And so the 60 years since independence have been tragically marred by a lot of the adjudication of these disputes. So, you know, in the worst case, civil war, ethnic cleansing, that kind of stuff. But even in the best cases, a lot of distrust, a lot of competition over rent seeking behaviour, our turn to eat when our president wins election, that kind of stuff.

So at a minimum level, I think states are probably like a necessary precondition for rapid development. The second thing that I would point to in a more near-term sense is that the East Asian states were at a critical sort of boundary in the Cold War, right? So, like, South Korea almost got swallowed up by North Korea. Taiwan was sort of the product of the Chinese nationalists losing the Civil War and for the longest time, actually to this present day, they're worried about getting swallowed up by China. Japan was also similarly worried about communist takeover. And so that sort of enabled a set of policies that are also rather unique. The first one, obviously, is land reform. So immediately after independence for these countries, they conducted large programs of land redistribution. I think politically this also helps. So tying into the state stuff, like, having a broad base of support in the countryside where farmers are part of your sort of governing coalition. And there's an incentive basically to engage in broad based agricultural productivity growth, not necessarily as a result of the redistribution, but because the state has penetration into the countryside and is able to do things like agricultural extensions, spreading fertilisers, high yield varieties and all this kind of stuff.

Yeah. So land reform was like a critical policy that had to happen because across the border, like in North Korea, they have a land reform policy. In China, they have a massive land reform. In fact, because it was so unpopular amongst the peasants, that's why the KMT got kicked out of mainland China. And Japan also had one like in the late 1940s. So, you know, that's just like one very critical example.

Industrial policy, also. The fact that basically a lot of these countries also received a large amounts of American military spending that was directly related to the boundaries of the Cold War. The fact that the United States was fighting these wars, these hot wars, first in Korea and then Vietnam. So it's difficult, I guess, to pinpoint a little bit, but the confluence of these factors - like the existential kind of threat, the fact that if you don't get your development policy right, you will just be taken over [by another country]. In Korea, this was like a very real part of the thinking. It energised things like industrial policy, the fact that we need to create our own domestic steel industry so we can build our own artillery, our own tanks and all this kind of stuff, because we're possibly going to be invaded by the North. Yeah, the boundaries of the Cold War are, I think, an understated component of why East Asia took off.

Tobi:Yeah, so, I mean, it's good you mentioned Studwell, did you?

Oliver:Not yet, but like kind of implicitly.

Oliver:I guess we're going to get there at some point.

So, ever since the publication of that book, How Asia Works, it's sort of become the standardised, informal canon of policy advice in this sort of general sense, perhaps not in the technical sense of what went right with East Asia and what you should do, roughly.

And one country that I think went full Studwell was Ethiopia, with the land reform, the focus on agriculture, the intensive focus on manufacturing, but it hasn't really, really worked out so well. So, to the degree that you know, what was wrong with how Ethiopia just sort of went about going Studwell, to use that phrase?

Oliver:Yeah.

There's a lot of different factors here. And again, I would not call myself an expert on Ethiopia. I've not actually physically been to Ethiopia. I've talked to a lot of Ethiopian students here at Berkeley. So qualify everything that I say with that caveat.

Tobi:Yeah.

Oliver:I mean, it's tragic. I know that this big manufacturing push was already not yielding the expected results before the outbreak of the civil war post COVID. That is just so obviously like a first order fact to point out that, you know, Ethiopia had this horrible civil war a couple of years ago and we're still dealing with the ramifications of that.

It's very difficult, I think, to like try and do broad based rapid economic growth if you just constantly have civil conflicts of this kind. The damage is obvious, I guess, from the pure human cost, from the number of people who’ve died, you know, from the war time kind of destruction. But also like whenever there's a stable sort of post-war kind of settlement, the distrust between the Tigrayans, the Amharas, all these different sort of ethnic groups is definitely going to shape policy. And that's like a common feature, I guess, of a lot of sub-Saharan African countries where there's always competition over spoils rather than thinking about things that could broadly benefit people. And I think that's also partly a rational response. I should also say that even though it wasn't colonised, Ethiopia actually, I think, has some features of a lot of well, it was briefly colonised by the Italians, but nowhere near the sort of penetrating kind of colonial regime. But Ethiopia itself was sort of a product in a response to European colonisation of sub-Saharan Africa, where in literal terms an imperial sort of project that sort of absorbed a lot of surrounding ethnic groups and regions to create buffer zones against European colonisation. So that's the underlying structural reasons for why you have a state that doesn't have a strong majority ethnic group. There's a lot of conflict that's been generated by that.

But even before the Civil War, as I mentioned, the sort of big manufacturing push was not yielding the expected results. There had been pretty impressive, I think, overall aggregate GDP growth under Meles Zenawi, where Ethiopia was achieving something like rates of like 10% GDP growth a year. You can quibble about those numbers, but I think it is probably true that Ethiopia was growing very fast. Most of that, however, was not turning up in the sectors that the state was championing the most, which were the big manufacturing push to very explicitly copy the model of Korea and Taiwan and the East Asian tigers.

Just to list some of the things that the state has done. I mean, the state has like invested in massive industrial parks, which are actually state of the art in terms of the facilities. So you have like the famous Hawassa Industrial Park, it has subsidised electricity for these places. So, you know, a common problem in a lot of sub-Saharan African countries that are trying to pursue manufacturing growth, you know, for instance Nigeria is that power is just simply unreliable or it's too expensive as a manufacturing firm you have to install your own generator that's an incredibly wasteful and costly exercise for everybody to have their own generator. The state has been subsidising electricity in those parks that's building you know the grand renaissance dam this huge sort of project to lower energy costs more broadly.

But even with all these massive explicit and implicit subsidies, the textile sector basically in Ethiopia has just like not been achieving the expected growth One factor that I've kind of identified, it again has to do with these labor costs, where there's just like an incredible amount of turnover, it appears, at these firms. Foreign firms who have sited in like places like the Hawassa Industrial Park, where workers will like turn up for like a couple of days, often their first sort of industrial job so they're coming straight from like farming, and they'll find that they just really don't like it. Or they'll find that conditions are horrible. They're not paid enough for their time. And so they just choose to leave. And I think this creates an incredible amount of churn, basically, where you never actually develop the skills to get better at your job. The managers of the firm aren't able to identify who are the highest performers and potentially promote them. And so it's this very low level equilibrium where you have this constant churn of workers who are not getting paid enough, who are very unhappy, and so the sector just never really grows.

I don't know quite what the policy prescription to that is. One thing I talk about in my blog is like potentially things like trying to institute like a general minimum wage. So if… let's say, the wage is generally set too low, maybe you could raise it to the level where people are like, hey, this job kind of sucks, but I'm getting paid enough to stay around and do it. And maybe that would enable for skill development, would enable for managers to identify the highest performers. But it is like a general problem. And it's a problem that Ethiopia, it appears, has not been able to crack yet. Unlike the East Asian countries, where the manufacturing sector was able to soak up a tremendous amount of labour that was coming in from the countryside. In Ethiopia, despite all these government subsidies, despite all this government effort to try and promote the sector, there just hasn't been a similar movement.

Tobi:I certainly don't mean to pick on Ethiopia or Studwell here. But I mean, just to double down on that question and, you know, emphasise what I'm really getting at. I mean, you can throw in a couple of scholars and public figures here, Justin Hodge, who look at East Asia and, you know, extract a couple of things as policy advices - do industrial policy, state capacity is the big difference, do you have to do land reform which will bring us to your latest paper - because what's certainly been true in the last couple of years, and I can point to your recent work or someone like Nathan Lane too on industrial policy, is that even a lot of what went right with East Asia, there's a lot of nuance to that story than the generalised, simplified model that we've been used to. So is there something wrong with how people are learning from the East Asia experience generally?

Oliver:So what you described, like my paper, Nathan Lane's work, like this is a historical stuff, right? We're looking at what happened in East Asia. But whenever you're talking about development, there's like this additional inductive step. Like, are the conditions that exist in Africa the same as the conditions that were faced by East Asian countries in the 1950s, 60s, 70s? And the answer is like plainly no. The global environment, the global marketplace looks substantially different. So this is, I guess, the third set of factors I would highlight for why there was a divergence between East Asian economic experience and sub-Saharan Africa’s, which is like the environment in which the sub-Saharan African countries are trying to industrialise is potentially just a lot less favourable than that was faced by East Asian countries. And this goes into things like global movements of prices, the relative price between commodities and manufacturers.

During the 19th century, this is work that's been done by Jeffrey Williamson. So [at] the initial stage of globalisation, it was actually not a bad bet as [for a] poor country, [that is] a country on the economic periphery to be a commodities exporter, right? Europe was industrialising at the time, and factories were going up, manufacturing output was going up, manufacturing productivity was going up, and it was driving the relative price of manufactures down. And so if you were like an Indian artisan making a lot of textiles, that was previously the textile hub of the world, this was a tremendous competitive hit, and this was bad for you. If you were an Argentinian cattle farmer and you're producing cattle that fed people who work in the factories and this kind of stuff, that was actually a really good line of business to be in. And so, you know, throughout the latter half of the 19th century, there was this kind of price movement where being a commodities exporter was good, being a manufacturing exporter was relatively bad, particularly if you were doing like non-industrial production in poor countries.

East Asia got incredibly lucky in some sense in that the period where it was trying to develop was very favourable, basically, to manufacturing productivity growth. Europe was basically starting to get richer. You know, it was escaping, I guess, the destruction of the Second World War and the First World War. and so it was recovering, it was growing economically very quickly and you know as you grow quickly you have greater demand for manufacturing goods. At the same time Europe itself was starting to shift potentially more to the services right and so there was an opportunity for places like Taiwan and Korea to start producing things that other markets would want like TVs radios that kind of stuff.

Yeah, the market environment that was faced by East Asia was like pretty favourable. Now, in the present day, the problem is that it appears that those conditions don't exist. In the West, actually, there's been a lot of development in automation that increases the productivity of manufacturing output. That's also true in the places that have claimed the mantle of being the world's factory, Korea and Japan, and certainly China, most of all, where you already have competitors who are able to produce manufacturing goods at a much higher productivity level than if you're a country starting out. And so it's no longer as easy just to rely on the fact that you have relatively low labour costs, like the East Asian countries did in the 1960s or so, to sort of compete in the global marketplace. You actually need productivity as well. And if you're competing against people who use a whole bunch of robots and machines in their production processes, it's just very hard to compete on costs. And so I think there is a sense in which maybe these lessons are not as applicable as we thought, because the sort of global context is just not as favourable to manufacturing growth as it once was.

Tobi:Again, I'm increasingly skeptical and finding it less useful some of what people say, especially when it comes to learning from the East Asian experience, because, oh, yeah, people say stuff like do industrial policy and once you run into the difficulty of doing that, [they say, oh] it's because you don't have the capacity, and okay, so how do I get capacity? Essentially, it's reducible to get a different history, more or less, which is kind of not so different from the institutional people, which is basically just go get yourself a different institution, which essentially means you get yourself a different history.

So I've become less enthusiastic about that sort of arc. Which then brings me to the question, what is the right way to look at successful countries and learn the right lessons that you can then apply to your own context? I know that it's not all different. There are some similarities. For example, I know that a lot of African countries are extremely protectionist in terms of trade policies and shifting a little bit more towards export-oriented sort of trade policies would help. But as an economic historian, how do we learn from history?

Oliver:Yeah, so this is where I would say that the label that I would wear is I'm a development economist, not an economic historian. Like, I do a lot of economic history stuff. My primary interest is like, what can we actually learn to help people today? The historical interest is very interesting. It's intrinsically important. But what's motivating me is, you know, what is actually useful? And I completely take your point. There's a sense, I think, particularly amongst academics, when you peel back the layers of the onion, in the end, it just comes down to, yeah, get a better history. You know, there's just like fundamental factors that are so deep rooted that, you know, basically you can't do anything about it. One answer that I give that's maybe a weird kind of like metacognition kind of point is that let's say you pose this question in 1945 or something. Right. That's not actually that long ago. My grandparents were alive in 1945. I can talk to them and ask them what it was like.

There was no way that they would have thought that South Korea, Japan would be as rich as in some cases richer than France or Germany. Like it was just like inconceivable at that point. I mean, Korea would have a civil war that would kill like 20 percent of the population in five years. And so the cultural factors were broadly the same. The history, you know, up to like 2000 years subtracting like 30 years or so was the same. But the transformation afterwards was just very difficult to predict. So I think there's a sense in which like when we're talking about these sort of factors behind why countries are richer or poorer, we have to remember that we're looking at them from like a very specific point. In 20 or 30 years things could potentially look very different and they can be very different in ways that are difficult to predict.

One example that i like to give a lot is, um, this is like a view that i'm less fond of, like, cultural kind of stuff. Culture surely matters but i think there's like a very strong instinct to want to say that culture is this fixed kind of entity, like these get a better history kind of arguments. It's like this sort of intrinsic quality that is tied to the people and just stays forever. And that's why you're rich or that's why you're poor. In the East Asian case, the answer that's often given by Lee Kuan Yew and others is Confucianism, right?

Lee Kuan Yew became a bit of a celebrity in the 90s or so, just like going around different countries and saying like, hey, the reason that you're not doing well is that you have not absorbed East Asian values of Confucianism, like filial piety, studying very hard for tests, listening to authority figures, having a well-ordered society along these lines. But if you go back 30 years, 20 years or so, scholars, sociologists, sinologists looking at the trajectory of China would have said that Confucianism was a terrible idea, that basically it resulted in states that were unable to adapt to the sort of conditions of modernity. You know, the Qing dynasty was not a great historical success by any means. It completely failed to adapt to the pressures of Western incursions. And so like there's a sense of which I think our descriptions, I guess, of history and culture should be a lot more malleable than I think these get a better history kind of views. The thing that kind of gives me hope is that I think it really would only take one. I know that there's like Mauritius and maybe some other examples, but it would take, I think, only one sub-Saharan African country. I don't know which it would be. Maybe it's Ghana, maybe it's Kenya, maybe it's Nigeria.

But it'll only take one to start demonstrating, I think, this sort of sustainable pattern of growth for that example to kind of spread. That's essentially what happened historically in East Asia. I mean, if you go back even further in terms of the history, the chauvinistic Western view is, you know, modernity was something that was exclusively a property of Westerners, right? Japan proved that very wrong. And that example spread to other countries in the immediate sort of cultural vicinity. I think the same process is definitely possible in Africa. And there's no reason, I think, that it can't happen.

Tobi:So sort of brings me to, I would say my weirdest question yet. I mean, the reason why people talk about development, the reason why someone like me is interested and doing what I do is that I want Nigeria to be rich in my lifetime. It's possible, but maybe not. But certainly that's the hope. Can you imagine a possible future where, to make it as concrete as possible, where 90% of the global population would be around middle income or something we call rich. Like, can the whole world be developed, essentially, is my question?

Oliver:I think so. I don't think there's any structural reason that's holding that back. I'm sympathetic to a lot of like leftist arguments. Like I know there's like core periphery stuff. Like if you're a big fan of like Raul Prebisch, you think that the world is kind of underladen by the fact that, you know, you have like underpaid people in the global south or doing the commodities extraction or whatever to help the rich world.

I'm sympathetic to parts of that thesis in terms of thinking about like why some countries are underdeveloped, particularly from a political economy standpoint, but I don't think in the long run there's any reason that all countries can't enjoy a decent standard of living.

Tobi:As a development economist, which you say is your preferred label, how do you think that development economics and some of the cool research and informative stuff that's going on there can influence policy more because that's sort of like a big, big thing for me because I see more and more governments in Africa becoming so detached from what works at least to a certain degree. So how can development research essentially influence development policy?

Oliver:Yeah, the framing of that question is interesting. You were talking about earlier, maybe before we recorded, that your concern was that African countries, maybe not even just African countries, maybe like developing countries in general, they're not listening to the policy lessons that academics have prepared for their research. But my take, at least coming from someone who was very recently in the heart of the ivory tower, is that academics, even development economists, which in theory should be like the most applied of fields, are not asking questions that are immediately relevant to governments and to policymakers in African countries.

So maybe both can simultaneously be true, like we're kind of like crossing paths past each other. But at least looking at the research production standpoint, when I look at what's published in top journals, often I'm just like, if the composition of development economists looked more like the people who are being studied, would we be producing the set of research? And my hypothesis is probably not.

The framing that you see a lot of development research, particularly coming out of the United States and Europe, is very much in the mindset of I'm a donor, I'm an NGO, I'm an aid agency. What can I do on the margins to make my program better, right? How can I make it more efficient? How can I like, what intervention would work the best? I think that's like a perfectly fine line of work. For instance, my advisor's work, Ted Miguel, he did a lot of stuff in deworming in Kenya. That has helped tens of millions, if not hundreds of millions of people. That is very clearly good to improve. But this is not a critique that's new to me. But broadly speaking, the area that considers the framing of like, if I'm a developing country policymaker, what sort of macro policies, what sort of like broader industrialisation policies can I pursue to sort of foster growth? I think that's a little bit more of a neglected area in terms of academic research. And so, yeah, I guess I would switch the framing a little bit where it's like, the problem I see is also from our end. We need to be producing stuff that's informed more by experiences on the ground, like people who actually know the problems and less about like what we think or what we can convince a grant maker is interesting.

Tobi:What's the one idea that you are most excited about, that you are most enthusiastic about and that you would like to see spread, become more influential? What is that one idea?

Oliver:So this is a bit of an odd one. It's a very nerdy one, but it's like a question that has been bothering me a lot recently. Maybe you can also react to this. It's like GDP is like a number. I recently read like Poor Numbers by Morten Jerven. Have you read this book?

Tobi:Yeah.

Oliver:Yeah, I read it like immediately at the end of my PhD. I mean, I've essentially done 10 years, 12 years of like economic research and like I first heard of this book. Basically the premise, it's almost like a sociology of how GDP is constructed in developing countries, particularly in sub-Saharan Africa. And It's not pretty. Like for those 10 years when I was a researcher in academia, you know, when you go to the UN website, you go to the World Bank, the IMF or whatever, and you download the GDP statistics going back to like 1960, you kind of assume that somebody has done the hard work of like making sure that this is correct. You know, there is actually an army of enumerators out there in Kenya or Nigeria or whatever. They've gone to every store and they've counted every capital good and they've done the math on this stuff. Morten Jerven's book shows us that that's just patently not true. Nigeria features prominently in that book. You know, it's not even clear how many people are living in the country. Population censuses are like an incredibly sort of politically divisive thing. I'm sure you could speak more about that. Various ethnic groups don't want to be counted or maybe they want to be counted more. That determines sort of the allocation of public resources. And so, you know, you don't even have the number of people in the country correct.

And I believe it was like in 2014 or so. This is, I think after the book was published, like Nigeria basically did a revision to how its GDP statistics were calculated. That resulted in a revision that was like something on the order of magnitude of 90%.

Tobi:Yeah. We’ll do another one very soon, ‘cause we’re like the fourth largest economy in Africa now, and I'm sure a lot of people are not cool with that.

Oliver:Yeah, Nigeria like spring vaulted past South Africa to become the largest economy. And like maybe both of those numbers are incorrect. Let's just say that one of them is like as a baseline. That means that at one point your number was 90% wrong. Like I think there's a sense in which like economists have been so focused on things like causal identification, all these crazy statistical stuff, ignoring like the basic question of measurement. If you had a thermometer that was like 90% wrong, like you would not read anything into the fact that your temperature goes up by like two or three degrees. You know, if the air is like 30 degrees, it effectively is meaningless to be making a minute decision. You know, it's not the fault of a lot of these governments. I mean, in some cases it is like maybe they mess with the statistics, maybe they underfund their statistical departments. But it is true that just like it is a hard problem to measure your economy.

There's this anecdote in the book where Morton Jerven goes to the Zambian statistical office and it's like one guy who does both the census and the GDP numbers. And so like that guy was like really well-intentioned, he's probably doing the best that he can. Zambia is like a country of 10, 20 million people and you have one person doing all that work. It's just not conceivable that you could have an accurate sort of statistical product. So getting back to your question, Jerven's book came out, I think everybody like kind of cites it respectfully and they're like, oh, you know, GDP statistics are just not something we should have like a high degree of confidence in, but we just like kind of go on using them anyway. Because what else are we going to do?

Tobi:Yeah. It's just a caveat somewhere.

Oliver:Yeah, yeah. The World Bank did some stuff. There's like a database they have of statistical capacity. So they rate countries from like zero to 100 or something like that based on how good their statistical agency is. But like, again, I spent like 10 years doing development stuff and I just didn't even notice it. So one idea that I've been pushing that I hope to maybe put into a blog post, maybe develop into a formal paper. is like we actually do have a way of kind of describing statistics that are very noisy, which is like, you know, it's election season in the United States, you know, you'll see like Kamala Harris versus Donald Trump polls. But if you're like a sophisticated consumer of this stuff, you always look for the margin of error, right?

Like when a poll is reported, If the margin of error is like 5%, which is very common amongst these political polls, whether Kamala Harris is leading Donald Trump by 47 to 46 or 48 to 47, it's effectively meaningless. There's just too much noise in the underlying measure to include anything from the raw number. I guess one idea that I like to promote is we should do the same thing for GDP statistics. For some reason, economists are willing to treat GDP as this very certain kind of metric without the appropriate degree of skepticism that they sometimes apply to other statistics. And so just having the margin of error printed next to the number, I think, is like a good epistemic reminder to be humble and be like, hey, you know, like these policies that we recommended that we claim boosted aggregate GDP by like point one percent this quarter. Like there's actually no way that you can actually detect that. And so I think that should encourage greater humility amongst economists and policymakers about how much do we actually know about the world and how much can we actually affect it.

Tobi:Not to mouth any kind of defense for Nigeria, but I think since Morten's book came out, there's been some improvement, particularly in measurement, because a lot of it is just the fact that funding statistical measurement is not a political priority. So for a long time, and I doubt it has changed currently…for a long time, the National Statistical Agency is funded by the central bank in Nigeria and not even by the federal government itself. So like Morten recalled in that book, when he came to Nigeria to do research on that book, the Statistical Agency was in the midst of a staff revolt due to poor pay. And the guys that head some of these agencies and try to do the work, they are real heroes because they are trying to basically perform magic with resources that are next to nothing.

I know that, again, the National Bureau of Statistics in Nigeria, the United Nations is heavily involved both in terms of funding and reviewing the methodology and improving the presentation and everything. But you would think that it is something that the government itself should be heavily invested in rather than foreign agency or a donor agency or something. So a lot of it is politics, really, because in the end, governments really do not make decisions based on these numbers. Hence it's not really a priority to get accurate measurements.

So, but I mean, hopefully things are improving, but it's not without controversy. The most recent one in Nigeria, for example, is that the World Bank and the ILO recently changed the methodology for unemployment. And Nigeria, again, just like the GDP thing, went from being 33% unemployment rate to 5% overnight. Right? So, we started having these technical subcategories like underemployment and informal employment, you know, and things like that. So it's politics, really. But i like your idea and we'll try our best to help you spread it as much as possible.

Oliver:All right. Sounds good.

Tobi:Yeah, so thank you so much, Oliver, for doing this. It's been fun.

Oliver:Thank you, Tobi, yeah it's been fun

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

In the episode, Tobi talks to Dmitry Grozoubinski about the politics and complexities of global trade, emphasizing the tension between free trade and protectionism. Dmitry explains how trade policy decisions involve difficult choices that impact both producers and consumers, using Nigeria's food inflation as an example. They explore the balance between national interests and global commitments, highlighting how protectionist policies are often rooted in political concerns rather than economic efficiency. The conversation also touches on the challenges of multilateral trade agreements like the WTO and AfCFTA.

Dmitry served as an Australian diplomat and trade negotiator at the World Trade Organisation and beyond. He has negotiated complex agreements in Geneva, at WTO and UN Ministerial Conferences in Kenya, and as part of the MH17 task force in Kyiv, Ukraine.

Before joining the Department of Foreign Affairs and Trade, he was a lecturer and tutor at the Monash Graduate School of Business and with the Australian trade consultancy TradeWorthy. He is the lead trainer of ExplainTrade and a Visiting Professor at the University of Strathclyde’s School of Law.

Transcript

Tobi: The complexity of trade agreements, the bargaining, the negotiation, and everything that surrounds the politics of trade generally does not get covered so much. It's always about the economics of it. And that's what I love about what you do, your project, your book, and everything. So my first question to you is that I know you wrote this basically from the perspective of global trade, and with everything that has been happening, I would say, basically, since the Trump presidency, which, like, brought trade into the headlines, particularly with the US-China “trade war”, quote unquote. And, of course, COVID is what we see with supply chains, decoupling, and so forth. But, I would also say to you that in development, the sub-field of economics that we call development, which is what we try to cover here on the show, trade is also a huge deal.

I'll give you a bit of a background. In Nigeria, currently, one of the biggest policy issues is the government trying to decide whether or not to allow the importation of food, basically rice, wheat, and all this other basic stuff. Primarily because food inflation is way above 40%. There's basically a cost of living crisis that has been going on for a few years. People are hungry, people are starving, people are angry because their incomes can no longer even feed them, you know? And so it generates this intense debate because on the other side of that, you have the producer class - the farmers and various lobby groups and political interests who say that, “oh, you really can't import, you're going to turn the country to a dumping ground, we're going to de-industrialise and so many other things.”

So one practical question I'll start with you is, if I were a politician, for example, and you know, with the title of your book, let's say that I am an honest politician. Let's assume that I'm an honest politician and I'm asking you that, Dmitry, how do I make this decision? What practical advice would you give me when considering trade policies generally? How do I make trade policy?

Dmitry:

I think that's a really good question, and I think it kind of goes to the heart of what trade policy is. Anytime you're doing trade policy, you're making choices, and they're often hard choices. You just laid it out perfectly there. You have farmers and other producers of food in Nigeria that are benefiting from very high prices. And you have consumers that are effectively suffering because a substantial part of their weekly budget is going to food, and more than was going before. You mentioned inflation at 40%. That is hugely unsustainable. So as a politician, when you are talking about the choice of bringing in more food, the first thing to do is you have to be honest. And you have to say that, yes, if you allow more food into Nigeria, you will hurt the interests of producers.

One reason I wrote the book is that politicians will often try to gloss over this and pretend it's some kind of win-win. They'll talk about competition. They'll talk about greater efficiencies. And that's all true to an extent. But in the short term, if currently you're locking out foreign rice, which is considerably cheaper than Nigerian rice, and you allow that rice in, you are going to hurt Nigerian rice producers. There's absolutely no way around it. So the first thing is to be honest about that choice you're making. The second point is to be honest about what you're trying to do versus what you're not trying to do.

So one of the ways that this particular debate often gets twisted into an uncomfortable alley is people will start talking about the notion of food security. So they'll say it's important that Nigeria be able to feed itself. And if we allow foreign food in, that will degrade our ability to be self-sufficient on food, right? To my mind, that's a way of basically misleading the public. It's very, very, very, very few countries are food secure in the sense that if trade were cut off tomorrow, they would produce enough food domestically to feed everyone in the country. Countries like the United Kingdom import something like 65% of their food. Why? Because it's far more efficient that way. And global trade supplies what people need. The amount of work it would take to convert the United Kingdom, for example, into being able to feed itself would mean you have to stop doing everything else in the country and prices would go through the roof. So it's important to be realistic about that.

It's also, I think, really important to say we live in an era of climate change. And one of the real problems we are going to face moving forward is that extreme weather events are going to become more common. So you are going to have parts of let's focus just on Africa, you are going to have in coming years parts of Africa that are in drought or flood, while parts of Africa are having a phenomenal crop. And those parts will shift around over and over. Our ability to feed people consistently moving forward is going to rely on us being able to move food from the places that are having a really good year to places that are having a really bad year. And I think any politician who is trying to say that if we just keep the walls around like the tariff walls, the barriers to importing food high enough, Nigeria will be able to feed itself forever every year without sky-high inflation, I think maybe is skipping over just the reality of where we live.

Tobi:

So, as you know, in places like Washington and the like, which gives advice to poorer countries on how to make policy and what will make them rich, you know that for about three decades, the orthodoxy has more or less been free trade. You know, you need to be more open. You need to allow more trade. You need to allow more goods into your country. Protectionism doesn't work. Which economically seems to be true, but right now, you have some of the richest countries in the world who have been advocates of open trade regimes, actually more or less going back to the mercantilist protectionist policies of the past. Which I think you sort of touched upon, especially the history of this in the second chapter of your book. So can you just give me a brief rundown on some of the shifts that we've gone through historically? And, like, what moves the needle on the dominant thoughts on trade policy?

Dmitry:

Sure. So when economists talk about free trade being the optimal path forward, what they're actually saying is, if you don't have tariffs, if you don't have trade barriers, we can maximise the efficient use of resources. So the free market will sort of allow and everyone will produce things in the most efficient way. And so overall, as a planet, we will be maximising our labor and our resources. And that's the benefit of that. They also suggest that having competition in your market pushes your own producers to work harder and having free trade can attract more capital. So inflows of capital from abroad that can make investments in your country. With the confidence that if they build a factory in Nigeria, if you've got free trade, if you've locked that in with treaties, they know that that factory will always be able to get the inputs it needs from abroad and always be able to sell whatever it produces to buyers outside of Nigeria. So that makes Nigeria a more attractive investment destination, for example.

So that's kind of the logic for a long time. And you mentioned Washington, Brussels, you know, the big economies generally tended to push that line and tended to believe it. Now, I would say straight away, it's important to note that they didn't universally believe it. So, for example, Europe is like, yeah, free trade's great unless you want to sell us certain agricultural commodities. So if you want to sell beef to Europe, suddenly free trade is not so great. And they protect their beef farmers or their lamb farmers or even their wheat and sugar producers. Ditto, America loves free trade when it comes to certain things. But if you try to sell America a light truck, you're paying a 25% tariff at the border. It's virtually impossible to sell certain kinds of services into the U.S. If you want to get a visa into the U.S., you sometimes have to do a job, you sometimes have to wait two years for an interview at a U.S. embassy. So even the rich countries that were preaching free trade were preaching free trade asterisk.

So what they were basically saying is, we believe that this is the optimal way to arrange the global economy, except on the things that we care about, the things that we're really sensitive on, where we think what's important isn't efficiency, but keeping the French farmer employed or protecting the US insurance market. What we're seeing now is that that asterisk is growing. So the US, Europe, China, all of these major players are increasingly saying free trade is great unless we have a national security concern. Free trade is great except when we want to rebuild the factories in the US Rust Belt. Free trade is great unless we want to create an instrument where you can't bully us with trade, so we're going to set up the EU anti-coercion instrument. So all of these kind of asterisks are being piled on top of what they used to be before.

Tobi:

One thing that often challenges observers, and I would imagine policymakers and politicians included, is the balance between, say, national interest, which again is becoming more prominent when it comes to trade policies, and global commitments, especially membership of world trade organisations, bilateral trade agreements, and other forms of multilateral agreements. And I want to get, especially from your experience advising and consulting on trade, what are the challenges or the headaches, the difficulties that leaders often encounter trying to balance between national interests, like, oh, we want to protect certain companies who are national champions, we want to protect certain key industries, and being signatories to a much wider multilateral, even bilateral agreements? How do you balance such contradictions sometimes?

Dmitry:

So the whole multilateral trading system, the WTO, all of it is built on the exact tension that you're talking about. You mentioned sort of balancing the national interest versus being part of the WTO. The WTO fundamentally only works as long as all of its members broadly believe that those two are the same thing—that ultimately what you're doing when you join any kind of trade agreement or really any kind of international agreement is what you're really saying is, "I am going to sign away my ability to do certain things." So I'm going to say I will swear off doing certain kinds of policies in exchange for you doing the same. And that's not because you never want to do those policies. You know you might want to do them in the future. But overall, you think the benefit of being in a world where no one's using those policies outweighs the short-term benefits of using those policies.

I compare it to like an arms ban treaty that bans chemical weapons on the battlefield. Chemical weapons are tempting to use on the battlefield because they can help you achieve a certain objective that might be really effective at what they do. They're horrific. But countries have come together and decided that the benefits of no one using chemical weapons and our battlefields not being full of chemical weapon residue outweighs any of the tactical advantages we might get ourselves from using chemical weapons. We prefer the confidence of a chemical weapon-free world to the benefits of having chemical weapons.

Trade agreements work the same way. You're always signing away the ability to use some policies you find tempting in exchange for that kind of global stability. So the tension tends to come because we are encouraged to be very short-term in our politics. And the benefits tend to be pretty narrowly focused and acute. So a specific industry is saying, "You have to protect me against foreign rice farmers." And that's something you can do today. The benefits of the global trading system and that kind of predictability are much, much broader, but much more diffuse. Everyone benefits from predictability. You get more investment. You get more trade flows. Prices overall are lower. That's all very good. But it doesn't have that acute politics of a particular industry that wants protection and will throw you a party if you give it to them.

So what political leaders are constantly fighting is the temptation to do something in the short term that weakens the system in the aggregate. And one of the few balances we have against that is the sense that if you do something like that, you're going to get retaliated against and other countries will hit you back.

Tobi:

I think one of the reasons why your book is well-timed is that it comes at a time when we are fundamentally learning that trade policy is inherently political, right? So a way to, like, further extend the last question for me is… sometimes I find it surprising that a lot of trade policies or trade agreements or even I would say maybe intellectual consensuses that have formed over time around a particular subject have political, intensely political origins and not economic or positive-sum motivations. So maybe you can provide me with a few examples from history of how politics have come to shape the conversation. An example I have in mind is recently the Biden tariff on electric vehicles from China. Most of the people, smart people, I should say, who have defended that policy would always say something along the lines of national security. America really needs to reindustrialise its core, you know, this and that. Because it's so obvious when you point out that if you want to transition to cleaner energies, if you really want to fight global warming, then slamming tariffs on electric vehicles makes absolutely no sense. But at the end of the day, people easily just recede to political arguments that would hardly pass water a couple of years ago. So I find that just contradictory, confusing. Help me out. I'm drowning here.

Dmitry:

I wish I could. I wish I could make it all make sense. The only thing I could do is first say—and this is a point that I hammer in the book over and over to the point where I'm worried I'm boring people—is that the big issues in trade have always been politics first, second, third, and then economics somewhere around, like, 26th. If you look at any major trade issue, it almost always comes down to, like, highly politicised questions. And there are really lots of examples on this.

So, for example, Japan, which generally has a reasonably liberalised open trade regime, has insanely high tariffs on rice, like hundreds of percent. And there is absolutely no economic reason for that. Rice farming is a tiny, tiny percentage of the Japanese economy. You know, Japan would be fine as a country without rice. But the traditional way of growing rice in Japan is very politically iconic. It's significant. They have a strong lobby. And so Japan, even while sort of preaching free trade, makes it incredibly difficult to sell rice to Japan in order to protect these small group of farmers.

Another story I like to tell is that when Australia did its free trade agreement with China, China is by far Australia's largest trading partner, hugely, hugely significant. And we finished the free trade agreement. It takes many years to finally get done. We sort of announce it to the public. We take it to parliament and everybody, the media, the opposition party, the entire national conversation becomes about this one tiny provision buried somewhere deep in the services chapter that creates a tiny visa subclass for like 100 Chinese workers a year to come work on gas projects in the middle of Australia. 100 people. 100 visas. But that sort of captures the national imagination. It becomes politicis ed. It becomes symbolic. And that's like the only thing we talked about for weeks on this trade agreement.

So we laser-focused on this issue that was hugely politically significant. But in economic terms, it was so small that it wouldn't have registered on any statistics. Like legitimately, if you looked at Australian nationwide statistics, a 100 workers working on a gas project somewhere outside Alice Springs is not going to even turn up on statistics. So this has always been the case. It is everywhere. And so I think what we're seeing now is just a continuation of that.

One thing I think we are seeing more and more of is politicians trying to distort the choices that they're making. You brought up electric vehicles. I think electric vehicles are one example. Solar panels are the example that absolutely gets me. Because there is no way we do anything about climate change without a transition to much cleaner energy. And right now, China is overwhelmingly the largest producer of solar panels. They are doing that through subsidies, and they are dumping these solar panels on the world market. We need to have an honest conversation about the trade-offs involved in taking those solar panels. Are we comfortable with allowing Chinese government money to create this giant industry, to create this dominant position in world markets if it means we get lots and lots of cheap solar panels? It's a hard choice to make, but it's a real choice, and we need to be honest about it.

So to kind of not answer your question properly because I can't think of any way to make you feel better about all this, it's that in some ways, what we had before—so I'm talking about before Trump 15 years ago—the trade conversations were mostly happening below the radar. There was mostly a consensus in the West about how trade policy should work. Trade very rarely made the news. You know, maybe with a big trade agreement, like the one when the US and EU tried to do, maybe around the Seattle round of the WTO, but mostly it was sort of hidden away in a corner and there was no public discussion about it. And now at the very least, it's in the headlines, and we're having conversations about it. And that is an improvement, even if some of those conversations aren't necessarily helpful.

Tobi:

My two-part follow-up question to that would be that regardless of one's disagreement or misgivings, the consensus around how these conversations are happening and how they influence policy changes seems like it's here to stay. I mean, like we talked about before we started recording, Trump might be winning another election and it's going to be another rollercoaster ride. So, I mean, in a common-sense kind of way, hoping that that prevails in actual policymaking, how would you suggest that countries balance the trade-off that may or may not exist between their economic interests and strategic imperatives like national security, trying to build up your defence base or be industrialised, and so many others that are intensely political and won't go away? How do you suggest the politicians or the advisors find a balance? Relatedly, especially in poorer countries, how do they find this balance without resorting to the kind of hurtful protectionism that we've seen with some countries over the years? So those are my questions.

Dmitry:

I think the only way forward is to be really specific and concrete about what you are trying to achieve. Because I think the danger that we're seeing now is that you have politicians identify a very high-level and nebulous objective. So you say like national security or to, you know, defend ourselves against China at some point in the future. And then they create that very, very high-level objective. They don't define what exactly they're picturing in their heads, like what they want the country to be able to do in that regard. And then that opens the door to justifying just about anything they want to do in any area.

So if I say, well, hypothetically, I am worried about the rise of China and I'm worried about having to fight a war with China and my industrial production in that event. Because, like, oh, what if we need to suddenly make a lot of tanks and bullets? If you've kind of set your objective that nebulously, then any time any factory owner comes to you and says, I want you to intervene in the market to help me, you can retroactively justify that. Because you can go, well, this factory is in trouble. If we go to war with China, we're going to need factories. It's important that we save this factory. And so you've kind of opened the door to politicians doing what is easy or tempting or popular on any given moment by not concretely defining your objective.

But I think there's a lot you can constructively do, even in ways that are sort of protectionist, that's fine, if you've narrowly defined your objective. So if you say, I would like to further strengthen Nigeria's IT sector, right? Like that's what you've defined as your objective. You can look at the barriers, the difficulties that the Nigerian IT sector is experiencing, and work out if there are places where a government intervention, including a protectionist one, might really help. And you've got like, I want to boost the Nigerian IT sector. My goal is to create 50,000 new IT jobs within the next three years. And I want us to have a really good ecosystem for entrepreneurial Nigerians who want to build apps. What would that take? What do I need to do? You've defined your objective. You've defined what victory looks like. And then if you say, OK, one of the things I really need to do to make that happen is to make it harder for Nigerians to use apps hosted in other places so that they're more inclined to use Nigerian apps. You can do that. And then two years later, you can see if it worked. We can judge the policy based on like, we wanted to create 50,000 jobs. We want to create lots of new apps. We took this step. It cost us something. It made life more annoying for Nigerians who wanted to use, like, Canva. But do we now have a Nigerian Canva alternative that's good, that people like, that's selling to the world?

So if you concretely define the objectives, are able to identify how what you're doing will deliver those objectives, and then finally have a way of testing afterwards if it worked, you can have a really mature conversation with the public about this is what we want to do. This is how we want to use the levers of government where trade policy is concerned to make your lives better in these ways. And then the public can sort of decide if the trade-offs are worth it. That's what has to be the mature policy discussion that needs to be taking place between the public and leaders, because otherwise you can just kind of justify anything if you say, well, I'm just doing this to create, you know, for prosperity or whatever.

Tobi:

I want to circle back to something you mentioned at the start, which is about winners and losers with regards to trade policies. Of course, there are always losers. I'll first seek a philosophical commitment from you, which is that on what side of the divide do you fall when it comes to wins and losses from trade policies?

Dmitry:

So where I tend to come from is that the kind of winners and losers framework can be really heartless in the sense that if I'm walking down the street and I decide I want to go for a coffee and I go into one coffee shop instead of the other, that is like a winner and a loser. Someone is going to earn my four dollars for my flat white and someone isn't. But that other company is going to be fine. So there's a winner and losers in that scenario, but it's not a big deal. Whereas, let's say you have a small town in Nigeria that's basically grown up around a factory. Let's say that factory makes shoes. And because of international competition, that shoe factory closes.

From an economic standpoint, like pure economic theory, you're like, well, kind of, OK, that's good because now Nigerians on the whole will get slightly cheaper or more better value shoes from abroad. And these guys can be freed up to do something else more efficient. But that's not how anything works, right? A linchpin factory closes in a town. You've got huge rates of unemployment. All of the businesses that feed into that factory are now in trouble. The doctor who treats the workers, they can no longer afford to pay her. So she moves to the city and now the town doesn't have as many doctors. So there's like a cascading effect. And a 53-year-old factory worker who makes shoes probably isn't going to immediately pivot to making TikTok videos for money. You know, they're not going to become a web developer overnight. So we need to be aware of just how bad it can be when trade creates losers. That doesn't mean you have to try to prevent it ever having any losers. But I think we have to be really, really sensitive to what happens when we create losers. And we need to have a plan for how we are going to help those that, frankly, capitalism rolls over.

Tobi:

I think you sort of answered my pushback because what I was going to say was that sometimes in reality, it can be difficult to tell a priori who the losers are going to be. I might be the trade minister, you know, staying in my fancy office in the capital and not aware that this little town somewhere in central Nigeria depends so much on the shoe factory until after we are seeing the effects. Maybe I get to hear it in the news or something. My question then would be that what are the right sensibilities that policymakers need to have as a general rule when dealing with wins and losses from trade policies?

Dmitry:

One of the things that trade ministries really struggle with is exactly what you're describing, which is in order to understand what the consequences of a trade policy decision are going to be, you really kind of need firm-level and local data. If you're just looking at national statistics, you get a very, very stratospheric picture. So one really common example is that the entire UK fishing industry, so absolutely everyone involved in fishing in the UK, contributes less to UK GDP than the company Games Workshop that makes Warhammer figurines. So if you're looking at national-level statistics, you're like, well, one of those is more significant than the other. But if UK fishing were to disappear overnight, that would be tens of thousands of jobs, dozens of coastal communities that would be devastated. And so if all you're doing is sitting in a capital looking at those high-level statistics, you're going to miss these acute pain points.

So one of the biggest challenges is how do you create a consultation system where the ministry and capital is talking to local authorities, talking to kind of mayors, talking to business associations that are spread all across the country and going, what would happen if we did this? Sort of what would be the consequences? Who would the winners and losers be in your local area? And what do we need to think about? What do we need to keep in mind? That's really, really important. I kind of go back to the example used right at the very start about the current debate that Nigeria is going through on importing food or not in the face of food inflation. And I think that's a really good winners and losers story, because whatever choice you make, you can sort of think through who the winners and losers are going to be.

So if you decide to open up your markets, the world price of rice and grain is published. You can have a look. You can examine how much of a hit that's going to be to farmers' incomes. There's no unknowns in that equation. So we can probably figure that out. Then you can decide, OK, if we let in more food, who are the farmers that are likely to be put out of business or significantly hurt, and what can we do to help them? Well, then on the flip side, if you decide not to let that food in, again, you've got statistics on how much does the average Nigerian spend on food? What is the current rate of inflation? Who in our society, if we keep these barriers up, is going to need help making ends meet and being able to afford to feed their family if we keep food prices where they are and we don't let food in? And how do we deploy the resources of the government to help them?

Tobi:

One of the things that I'm most fascinated about is countries that were previously poor a few decades ago, who are today global giant exporters of certain technologies or goods or commodities. So how would you advise a country that is trying to develop a globally competitive export sector in general? Because the consensus in development economics is that exports help your economy, exports help you grow, create jobs, your industries are upgraded, you're able to import technology and upgrade via all that. So how would you advise countries? What policies would you advise countries to focus on that are trying to build from scratch a globally competitive export sector, especially at the firm level? Because we tend to focus on countries, but it's actual firms that are making these goods and exporting these services, you know, and there are international regulations and standards to comply with. So how would you advise countries to do that?

Dmitry:

Really big question. And obviously every country has its own local challenges. But let me try to give you like a big-picture answer. And I respect your audience to know that I'm painting with a really broad brush. So the fundamental issue is you want to build a competitive export sector. Almost certainly that requires investment because unless you are—maybe if you're like growing saffron, you don't need that much investment. But almost anything else you're going to make, you're going to grow, you're going to export, requires capital and investment in order to do.

Capital looks at opportunities, but they're also really sensitive to risk. So, the question then becomes for governments, how do you send a de-risking signal to a potential investor? An investor is looking at your country, thinking about building a factory there. What are the risks that they're thinking about? Increasingly, factories are modular and can go pretty much anywhere. It's not like it used to be where you have to build them only in certain places. Theoretically, a factory can go almost anywhere. Then the question for that investor becomes, firstly, will that factory be able to consistently get what it needs to operate?

What do factories typically need? Well, you need workers who are capable of working at a modern factory. So that means your education system has to be producing good, talented workers. Second, it needs power. So the power grid needs to be reliable. Third, it needs predictability of your trading regime. So it needs to know that that factory will be able to import the parts and the components it needs from abroad reliably and be able to export reliably. Fourth, it needs to know that the infrastructure is there for it to be able to get its stuff in and out of the country. Fifth, it needs to know that your legal and regulatory regime is robust and predictable and that they won't run into legal challenges.

Now, that's really big picture. There are ways that individual governments have been phenomenally successful at ticking all of those boxes in microcosm ways. One concept that's really taking off all over the world is creating special economic zones. So you designate a part of your country, literally like a couple of square kilometres, and you say, this is going to be the special economic zone, and I'm going to focus on attracting investment and production here. And then inside that zone, you create better regulatory conditions. You create better tax conditions. You then deliberately build infrastructure to that zone because you know that's where the factories are going to be. So you can save on rather than trying to sort of do stuff everywhere, you just build like a really good railroad just to that zone.

When you think about the regulatory compliance challenges that a lot of businesses, especially in the developing world, are worried about, what they're actually worried about is the countries we want to sell to are going to increasingly create new regulations on how green stuff has to be, how carbon neutral stuff has to be, how slave labor-free it has to be, all of these kind of new standards and rules. The challenge for most developing countries isn't in meeting those regulations. It's in proving that you've met them because it's not enough to be carbon neutral. The customs official at the port of Rotterdam has to accept that you're carbon neutral.

And one thing that special economic zones allow you to do is that you then set up the trust to say a laboratory that tests your meat products for all of the things that your buyers are worried about, you set it up in one place. And because it's servicing the entire special economic zone with lots of businesses inside it, that makes commercial sense rather than trying to build one all around the country. So one way that you can think about this is by saying, OK, it's going to take too long to raise the entire country up to the level where it ticks all six of those boxes for potential investors. But we can start building individual areas that tick all of those boxes and use those to lift the rest of the country up.

Tobi:

I love the answer so much, especially the latter part. And speaking on regulatory standards and the like, a couple of years ago, and this was after years of debate, African countries finally signed up to what they call the Africa Free Continental Trade Agreement. I'm not sure if you're aware of that. So it has faced difficulties. So I would say it hasn't lived up to its promise. And part of the challenge is that it has been really difficult to scale up or harmonise the regulatory and the standardisation, that is, both legal and logistical and all the other things has been really, really challenging to replicate that across all the signatory countries.

But as we saw with Europe, that in itself can then become a challenge, you know, because you can have farmers in England angry that Brussels is making the rules, or people in France complaining that German goods are unfairly competitive because Germany suppresses industrial wages, or you have Greeks complaining that their tourism sectors cannot compete with Turkey because the euro is overvalued. So my point is, what are the benefits and risks of single market type of trade agreements, and how can you make best use of them, and how can you like, you know, slam on the brakes so that it doesn't break stuff domestically?

Dmitry:

So the dream of the AfCFTA is pooling all of the unique strengths of different African countries together to make a much more competitive whole. If you think about the strength of the US economy, one of the things that makes the US so economically powerful is that you can combine and build something across five different US states. And then you get lower wages because you're manufacturing it outside of Detroit, but you get to bring in capital from New York. You get to bring in design from California. You get to bring in raw materials from the Midwest. And you can do all of that because there are no internal borders to cross within the US. You just load up your trucks with the materials and you drive them across and it's all seamless. And then it goes to a port and leaves, right?

That's kind of the advantage. And that makes the US a lot more economically powerful than the 50 individual states would be on their own. And that's kind of the dream of the AFCFTA too, right? This idea that you'll be able to combine stuff that was made in Nairobi and then sent to Nigeria for further processing and then maybe shipped out of the infrastructure in the ports in South Africa, right? And at the moment, that is a huge, huge bureaucratic challenge. The WTO once screened a documentary where a television crew basically followed a truck driver driving a shipment of flowers from Central Africa-West and eventually to Europe and just photographed all of the paperwork that driver needed to cross each of the individual internal African borders. And it ended up almost being a second truck worth of paper because every single border required a different version of the form that he needed to carry. Because every country had its own export and import declaration, and every country had its own plant health declaration.

All of that makes it much, much harder to manufacture Africa-wide and build a competitive product. That's the advantage. Obviously, there's some benefits to local consumers as well, bringing down prices. The disadvantage is the inability to kind of compete with other African countries on your regulatory regime. Everything becomes a lot slower and more rigid because if you have to design a new regulation, but in order for it to come up, be real, you have to agree it with every other African country in the context of the AfCFTA, you can't be agile and dynamic anymore. Nigeria can't go, I am going to attract more investment than Uganda by having a looser regulatory regime around something. So you lose that ability to compete internally, which can be good and bad.

And as you say, it does tend to generate its own political antagonism, because what you were describing in what all politicians in Europe talk about is the fact that anything bad that happens is the fault of Brussels. Anything good that happens is them. So the system like that builds up its own opposition because it creates the incentive to blame all of the problems on the AfCFTA while claiming all of the good things that happen for yourself. And over time, that builds up resentment and political opposition to the project.

Tobi:

Recently, I was reading in the news something about the Director General of the WTO warning that we must not return to the protectionist policies of the past. I mean, the whole leadership of the WTO, in my opinion, can sometimes cut a hapless figure. Because here you are, sometimes it seems like the wheels are really falling off global trade, and you have the premier institution of global trade basically toothless to do anything about it. But again, when you then talk to countries or you hear politicians from individual countries speak, you turn around and blame the WTO, the inability to enforce certain rules, which then creates this unfairly competitive environment, you know, maybe some accusations that have been levied against China, for example, the China shock.

So my question to you would be, what are your suggestions on how to fix WTO, or do we need an entirely new framework for the governance of global trade?

Dmitry:

So my best advice is to think about what the WTO is set up to do versus what it's not set up to do. I think your diagnosis is 100% right. You're seeing a shift towards other priorities away from just liberalising trade. You see major players doing things like the European Carbon Border Adjustment Mechanism, the US's IRA, their big kind of investment, sort of, green energy transition bill that has a lot of subsidies. So you have all of these really, really big things that governments are doing. And expecting the WTO to stop them is crazy. If the European Parliament has just passed the biggest climate deal it's ever going to do, it's not going to reverse it just because someone in Geneva complains about it or because someone takes a dispute with the WTO. So the wrong way to think about the WTO is in preventing all of this. The WTO has to explain what are the dangers and what are the trade-offs, and that's important. But the WTO, I think, also has a really significant role to play in shaping the implementation.

So let me give you like a really concrete example. The way that the EU's carbon border adjustment mechanism is going to be implemented or is implemented is incredibly complicated and has lots of different potential kind of externalities that might be hurting, for example, African firms in a way that the EU never intended. The WTO is actually a really good place for African countries to come and say, hey, EU, the specific way you're doing the CBAM is hurting my companies in this specific way, and we have an idea for how you could fix it. Not by reversing CBAM, but by changing a little bit the way it works. It could be just something as simple as the verification requirements, the forms, the procedures.

And the WTO, because of the way it's set up, because there's procedures, there's committees, there's experts, there's a process to follow, is a fantastic place for us not to prevent deterioration of the trading order and other priorities being pursued, but to shape them in a positive way, to mitigate unintended consequences and kind of add some oil to the machinery of whatever the global trading system is turning into.

Tobi:

So my final question to you, Dmitry, is this, and again, this is a bit of a tradition on the podcast. What is the one idea, just one, that you would like to see spread everywhere, that you would like people to be excited about, that you would like to be more influential? Just one idea. It can be your idea. It can be borrowed. It can be from any source. What is that one idea?

Dmitry:

I think one of the coolest programs I have ever seen is working visas for young people. A lot of rich countries have this between themselves. And what they say is basically if you are under sometimes 35, sometimes 30, you can come over and work in our country for a year or two years. And it's not immigration. You come over, you work. And it is such an amazing way of bringing like the world together, bringing new cultures into other cultures. The people come back with incredible experiences. You know, they come back and they start businesses back home. They bring ideas. And it's so amazingly powerful for spreading ideas, spreading cultures, spreading conversations. It's like stimulating economies, but without brain draining poorer countries. One idea I would love to spread is just the idea of letting young people all over the world spend some time in a hassle-free kind of visa manner, working wherever they want to work, doing the jobs that they want to do, just so that we have a world where more people have experienced what it's really like to live in another culture, and more people have the experience of working with entrepreneurial, exciting young people from all over the world, rather than just their backyard. So that is one idea I would love to see spread, love to see take off. And I think it would genuinely make the world a more pleasant place to be alive in.

Tobi:

Yeah, yeah. And we will do our best to help you spread that idea. My guest today has been Dmitry Grozoubinski. You should check out his wonderful book, Why Politicians Lie About Trade and What to Do About It. I want to thank Dmitry for coming to the show. It's been fascinating talking to you.

Dmitry:

Thanks so much, Tobi.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

Manuel Hinds shared his experience reforming El Salvador's economy post-civil war, highlighting the importance of stabilising the fiscal situation, reducing tariffs, and privatising inefficient public companies to introduce competition. He emphasised the necessity of cutting the central bank's direct financing to the government to curb inflation. He suggested that investing in human capital and education is crucial for long-term economic growth. Hinds also discussed the need for practical and disciplined policy implementation, cautioning against reliance on populist promises and advocating for a pragmatic, reality-based approach to economic management.

Manuel Hinds has served as minister of the economy (in 1979) and of finance (in 1995-1999) in El Salvador, as division chief at the World Bank (in the 1980s and early 1990s), working with more than thirty countries, and as the Whitney H. Shepardson fellow at the Council on Foreign Relations in New York (in 2004-2005).

Transcript

Tobi:

Let me get a little background into your period during the reform in El Salvador. I know you spearheaded the reform of the economy, the currency regime, and a lot of things. What was the situation like when you came into the picture? What were the problems, and how did you approach it, especially on the political economy side, you know, getting the buy-in of the elites or entrenched interests who might be opposed to the reforms?

Manuel:

El Salvador, when I came into the picture, I came into the picture in two stages. First, I was working with the World Bank, and then I went back to El Salvador and started as a consultant to the board of directors of the Central Bank. It was just one meeting a week, and that was it. Later, I came in as the Minister of Finance.

The situation was this: El Salvador had been in a civil war. We are a small country, 6 million inhabitants, but the civil war was very bloody. We had 80,000 deaths and the country was, for 10 years, in this terrible division. But then, you know, the people became tired of the war and all the population made it clear that they wanted peace. And then with the help of several friendly countries and the United Nations, we had a peace accord in which there was no winner in the war; the winner was the people. We reformed the constitution and we had free elections. And then, the country started on the right foot, i’d say, because everybody in the different political parties were willing to go the extra mile so that things could be done very well.

In El Salvador, the period of the president is five years. I came in the second, after the peace accords. The peace accords were in 1992 and I came to the government in 1995, January 1995. El Salvador was very similar to many Latin American countries, and actually many African countries as well. We had a lot of protection. The protective tariffs went up to 100 and something. We had Central American common market, but that was a very small market still. And also we had a problem with the pensions. We were accumulating a lot of liabilities for the government without enough income. And also we had very ineffective public companies.

So when I came in, the president invited me to give him a presentation of what I thought we should do. And when I made the presentation, he said, "Well, I'm prepared to do this, but if you are the minister of finance." So he put me in a corner, you know, and then I said, OK, I'm going to do it.

And then we started with number one: we had to stabilise the country, which meant that we have to stabilise fiscally the country because we have been spending a lot, particularly, but not only, in the war, the war effort. So when I came in, I had the advantage that we could reduce substantially expenditures just by reducing the army. So the first one was we were up because the inflation at the time was something like 28%. It was between 20 and 30%. It had started to go down in the first period after the war. So when I came in, inflation was probably 20 to 25%.

Also we had very high import tariffs. We had the problem of the pensions. And also this was a time when the communications were starting to have a revolution. This was 1994. So you could already see that this new technological revolution was really connected with communications. And we still didn't have internet. We still didn't have good communications. So we had to do something about it. And also we had very expensive electricity. So I made proposals for each of these things.

In the case of inflation, the problem that we had was that the government had very high deficits and then the central bank would finance them. Because the inflation rate was high, then the interest rates were extremely high. The rates of interest were something on the order of 20 to 25 percent. Since the people didn't trust the currency, it was almost impossible to get mortgages from the banking system and long-term credit for investment. So the government had to spend a lot on subsidies and providing money so that the banks use that money to finance long-term.

When I came in, I was telling you that the inflation was coming down and two years after I was there, inflation was 2%. 2 or 3 percent. So inflation was not the problem, but the rate of interest remained very high, 20 percent. The problem was that people said, "Well, these people, they are not going to devalue the currency, but the next government may devalue the currency because this was what many people in Latin America were doing at the time." So I propose to dollarise, I propose to reduce the tariffs, the import tariffs, also the reform of the pensions, which rather than having a pay-as-you-go, we will have individual accounts and people will save for their own pension in an account under their name. And also the privatization of electricity and communications, the telephone company. But we propose to privatize under competition. You are very young, probably, you never lived in that time when electricity and communications were natural monopolies. And everybody said, "Well, it's impossible to have competition in these sectors because the investments are too high. And if everybody invests in telephone lines, then it will be a waste."

But we said, "No, we are going to introduce competition in the market" because already there were ways in which we could have competition, even with the landlines. But also the mobile telephones were coming. So we issued a law of competition in those sectors. And we privatized these companies in two or three companies, different companies. And also we opened for anybody who could get into these businesses. Mainly in communications, very fast, we had something like 40 different companies with cellular phones. We had this system in which company A could use the lines of company B paying at all. And we did the same with electricity. So this was a success.

Also, the pension funds were created and they started saving a lot and we reduced the protection. This was the most difficult of all the things, because the companies become used to being protected and they don't want international competition. So it became a political problem, really, and we were afraid that we wouldn't be able to pass the new law through the National Assembly. And then the president told me, maybe we are doing too many things. Let's choose three or four and we concentrate on that. And of course, the reduction of protection has to be one of them. We had to increase the value of the tax because we were going to reduce protection and we were going to reduce the income of the government and we were going to need some more revenues and then we increase…and that was also a difficult thing to pass.

Then we dropped dollarisation and all the other things we finished, what we had proposed. Then dollarisation was done by the next government. The country dollarized in 2001. I was no longer the Minister of Finance, but the new president called me just to do that. So I worked with the government just to do the dollarisation with the new government. Dollarisation is not the only way in which you can stabilise or reduce interest rates, but it's a very cheap way of doing it. And it has worked very well. Many people said, if you dollarise, in the first world crisis, you will go out. Because you won't be able to have a monetary policy to survive. And then, you know, in 2008, we had the world crisis. And then in 2020, we had COVID. And actually, El Salvador fared extremely well, better than all our neighbours, because the market controls the supply of money very efficiently.

In 2008, a Marxist government came on board, and they didn't like the dollar for obvious reasons. They asked the IMF to make an assessment of dollarisation. And the IMF made the assessment and they said, well, El Salvador has reduced a dead weight in the economy, which is the currency risk. If you eliminate the currency risk, you can win easily 1% of GDP. So it's a very cheap way of doing it and you reduce the working load on the government because El Salvador doesn't need to worry about the exchange rate or about inflation. It comes automatically, the market does it, so it's very good.

I remember I mentioned this in my plan, but this has not been done in El Salvador. Already in that time, 1994, the world was coming into the knowledge economy. It wasn’t really clear, but now it's crystal clear. The new economy in the world is organized around knowledge. And you can see that in everything. When I was talking about this in 1992, 93, 94, the world's most powerful companies were industrial companies. They have chimneys, they got tremendous industrial production, they produce cars or electric equipment and so on. The largest was General Motors, and they were very noisy companies. Now the largest companies in the world look like universities. It's Apple, for example. Microsoft. All these companies, they produce nothing but knowledge. That's the only thing that they produce, because Apple, they don't produce anything physical. They subcontract that. They outsource the production of the computers and other things. They only produce software, designs, and that's where the big value added is.

So like the industrial revolution, when you have a technological revolution that is very good for us the developing countries, because you can jump without having to go through all the things that you needed to be industrial. Of course it is not easy, you have to invest a lot, but rather than investing in many things, you have to invest in your own people.

When I grew up, people said to have education and health and housing is the social sectors. But before having the social problems we need to produce and we are going to produce this with companies, manufacturing cars and planes or whatever. And then when we become rich, then we are going to spend money on health, education, and housing, and really, now it’s the other way around. Because if you don't have educated people, you cannot grow. What are the countries or the regions that are growing faster in the world? Well, you have Silicon Valley. Silicon Valley, they have Stanford University right there. And also they have many other, San Jose State University, Berkeley, and so on and that feeds these companies with the inputs they need. And the input they need is people, good engineers, good scientists. If I could tell you one thing only, I can say invest in your own people. Invest in education, invest in health, because that will allow them to become more productive and then the country will become rich.

Tobi;

There's so much packed into your answer that I'll have to untangle them one by one, because I feel you are uniquely positioned to untangle some of the questions that I have. You’ve been a researcher, you've been a foreign expert with your work with the World Bank, you've been a senior cabinet member and reformer in your own country, El Salvador. So I would like to start with inflation, right? In my own observation, poor countries in the context of the macro economy stumble periodically and struggle with three crises, which for me are inflation, exchange rates, and debt.

To start with inflation, for example, in Nigeria, we also have double-digit inflation. It's 33% now, food inflation is 40%. It's causing a cost-of-living crisis in the country. And the government through the central bank is struggling to bring this under control, which we have been doing for the past eight, nine years, right? But what I want to ask you is that to the degree that you can generalise from your own direct experience and knowledge, what are the common causes of inflation in poor countries?

And I ask this because there is a lot of mischievous debates when you're trying to talk about inflation, particularly determining whether it is a monetary phenomenon or a non-monetary phenomenon. I feel like people who are addicted or amenable to government spending will tell you, "Oh, it's non-monetary and that Milton Friedman was wrong." And they paint the other side as neoliberal, orthodoxy, textbook economics. So I would like you to help me tease out what are the nuances in the inflation phenomenon in low-income countries.

Manuel;

Yes, well, we can go from the more general to the particular, maybe. Because the problem that you mentioned is the basis of underdevelopment and this is something that Africa shares with Latin America. Do you remember this guy called Sisyphus? Sisyphus was this guy who did something that the gods didn't like, and then they condemned him to push a boulder up a hill. And when he reached the top of the hill, the boulder would come down to the valley again, and then he had to go back and push it back up. And if you look in Latin America and also in Asia, from time to time, you had a good government who come here and stabilise the economy, stabilise the country, the interest rates go down and then you think now we are going in the real path of progress. And then suddenly there is a new populist that comes in and starts promising lots of things to the people. And then they borrow money to spend a lot in the government in things that are not really developmental. And then after a few years, the country is again in the same situation.

Tobi;

Precisely.

Manuel;

In Latin America, you could see the worst case, this happens all over Latin America. But the most dramatic case is Argentina. Argentina in the early 20th century was the seventh richest country in the world. They were very, very, very rich. Because of this thing that they started having high inflation because of populism. You know, people coming, the politicians come and they promise things and get elected, and then they waste the money, and then you start having problems of the problem that you have in Nigeria. Nigeria, compared with Argentina, is moderate. The inflation rate in Nigeria is 40[%], you told me. In Argentina today, it's 300[%].

Tobi;

Yeah. True.

Manuel;

And then because of these things, because of this continuous… this Sisyphus thing, they stabilise, then they destabilise and so on. Argentina now is number 66. Rather than being seventh, now it's the 66th. Because they have spent a century just trying to stabilise the economy.

I think that at the very end, if you analyse the problem, people have the governments they deserve. If they elect populist people, then you have destabilisation. You have there [in Nigeria] a problem of education, exactly like in Latin America, but it is a certain kind of education for that problem. The education is the self-assurance that you can do it without needing a miracle and then “we are going to work hard for one generation. The developed countries, they work for one generation or two generations and we are going to really build a new country.” And the other one is, “no, there is this guy who says he is going to solve all the problems and that this will make us rich.” You know that Latin America has 200 years of independence, 200 years. And in 200 years, we are back in the same position, relative position to Europe that we had in the early 19th century. And Argentina went from rich to poor and Latin America remained poor.

This is an education in common sense, okay? People have to come to the realization that miracles do not happen. That even when they tell you, “well, there is the Japanese miracle,” but that's because the Japanese had educated the population a lot before. And the same in Korea. So what we have to do is we have to invest in the people like Singapore. Singapore was much poorer than Nigeria. It was much poorer than El Salvador also. But they invested in education, in common sense, in saying, OK, we are going to work and then we will become rich. And we are not going to expect a miracle, because expecting miracles, you see what has happened. We are in the same position as 200 years ago.

The question is, why is [it] that countries create so much money? They create so much money because they want to spend, they want to go into very big fiscal deficits and to pay for them, they print money. - MH

So that's the first problem that you mentioned. And that is the basic problem, Tobi, I think that if you solve that one, then you will start seeing solutions for the other things. Because people themselves will find the solutions to the other problems. The other problem is, is inflation a monetary problem or is it a fiscal problem? I think it all depends on what is the angle that you are looking at. I think that inflation is definitely a monetary problem. The question is, why is [it] that countries create so much money? They create so much money because they want to spend, they want to go into very big fiscal deficits and to pay for them, they print money.

In El Salvador, many people believe that we reduce inflation because we dollarised. And that's not true. Inflation came down because we forbade the central bank to finance anybody. A new law for the central bank said the central bank cannot lend to the government ever. Period. And it cannot lend to the banks except in the case of financial crisis. Only in those circumstances. And then the inflation went down, the inflation went down from 20 something, almost 30 percent to 2 percent within three years or something like that (three or four years). But of course, you need the discipline to really not lend into the government. So I was the minister of finance and I could not borrow money from the central bank. So the only possibility I had to do that was to reduce the deficit and also borrow money abroad. And of course, when you borrow money abroad, you are subject to a certain discipline, you know, because you have to convince other people. When you want to finance the government just with the central bank, then the minister of finance just takes the phone and calls the president of the central bank and [says] sell me so much billion. But when you have to go to the international markets or to the World Bank, or to the African Development Bank, you have to justify why you need the money, how you are going to pay, and so on. That introduces discipline to the government. So I think it's very important to separate the monetary and the fiscal, so that you cannot use the authority of the government to force the central bank to give you money. And you can attain that in two ways. One is to have a strong law and applying the law. Or you just outsource the supply of money to the government of the United States, to the Federal Reserve, in the case of dollarisation. Or you could adopt the Euro. But the point is, cut that link. It's like a drug addict. The solution is not to give them drugs, period. That’s it!

Tobi;

That's so deep and apt because, again, with the Nigeria example, we had eight years of unrestricted monetary finance by the central bank, more or less just printing money and borrowing the government to the extent that the existing law, which places a cap on how much monetary financing can be done, was broken several times. Which leads me to my next question to you is that, so you can pass a law, but how does the subject of central bank independence and the politics of it play in here? Because laws can be broken if the political leadership is highly motivated to do so.

Manuel;

The thing is, I am 78 years old. I have worked as an economist for, I don't know, 50 years. And I can tell you, if there is one lesson, there is no perfect system. There is no automatic system. It's people. If you buy a car, and it could be maybe a Ford, you buy a Ford, which is not very expensive, a small Ford. And then you give maintenance to this car and you take care of it, you don't drive it in dangerous circumstances and so on. That car could last for decades. But you can buy a Rolls Royce, and if you go and you crash it ten times, you drive it on the beach and then you go into the ocean with it and the saline water comes in and so on. You will destroy the Rolls-Royce. And it is not because the Rolls-Royce is a bad car, it's because you are abusing the car. And that is what happens. You can have a good central bank and a good government in which you establish a rule, as we had in El Salvador. We had a law saying the government cannot lend money to the government. And we met that, you know. We met that condition. It would never again happen. We were one of the worst risks in Latin America, even if we never defaulted. El Salvador is one of the few developing countries which has never defaulted. But we had a very bad risk ranking. Five years after the war, we became investment-grade. So we could borrow at very low interest rates and so on because we were meeting the conditions we ourselves had established and people respected us. But now, 30 years later, inflation is very low because we are dollarised and the rates of interest for the private sector are very low. But for the government it's 16% because they have been borrowing like crazy in the international markets. And it is because the new government, it's the Sisyphus story, they found that the country had a very good possibility of borrowing money and they borrow and borrow and borrow and they are compromising the stability of the country.

So that's why we go full circle. If we vote into power a populist government which will spend money like crazy, then we will go back. There's no other way. So I think that what you do, for example, is a very good thing. You have your podcast, you are instructing the people so that they can learn. In Latin America, we have a literary style called magic realism. You are familiar with that or not?

Tobi;

Yes.

Manuel;

Yes, magic realism. And then we have been infected with magic realism in economics, which is that you think that you can float in the air, that you can levitate and so on. People have to understand you cannot levitate, you cannot borrow because you will have to pay for this money.

But now I don't know, Tobi, what is happening in the world, because look at the United States, uh?

Tobi;

Yeah, it’s crazy.

Manuel;

They are going down the drain. The same as Nigeria, the same as El Salvador. It's incredible. It's really incredible. I think that at some moment we have to hit rock bottom and say, no, no, no. We have to start over and start seriously and so on.

Tobi;

I hope so.

Let me talk to you a bit about exchange rates. Another thing that poorer countries or low-income countries or what we call developing countries struggle with is this exchange rate problem. In Nigeria, for example, the source, the main source of foreign exchange, which is oil, has collapsed due to incredible corruption, lack of productivity and investment in that sector, years of neglect. The law that was supposed to reform the governance of the sector was held in the parliamentary system for almost 20 years, and the version that got eventually passed was an inefficient one, evidently.

Now, poor countries run into this exchange rate crisis when they run out of dollars, basically, and what you hear is that, oh, you need to diversify your economy in order to bring in more dollars, you need to export more because then you start rationing, the system becomes corrupt, you introduce a peg, suddenly the black market in currency becomes thriving. What are the common sensical ways to manage currency risks? I would emphasise that besides dollarisation, I'm a big fan of the dollarisation idea, but it's just that, for example, in Nigeria, it will be almost like a non-starter. For example, we have a law, I know laws can be changed, but the constitution of Nigeria bans any other currency being used for transactions besides the Naira. Even though that is the law, but in reality, people do transactions in dollars and different currencies all the time because the local currency itself can be so volatile and unreliable as a store of value. So besides dollarisation, how can poor countries manage currency risks? Like in the mood of this conversation, what are the common sense insights that we are missing?

Manuel;

You can do what we did, because we dollarised after stabilising the country. When the inflation was already 2%, then we dollarised. One thing was not the consequence of the other. It was that we dollarised to reduce the interest rates, to reduce the risk. But then a new government came into power when the war was still going. And then with an economy in war, the central bank had done exactly the same things that you are talking [about]. They control the exchange rate. They had strict exchange controls. If you were an exporter, you had to deliver all the dollars to the central bank. If you were an importer, you needed a special license to import. Then there was this black market, and there was incredible corruption. Everything that you described to me, that was happening in El Salvador. So this government, the first thing they did was to say, "We are eliminating all the exchange rate controls." Flatly. That if you want dollars, buy dollars. If you want to take your dollars out of the country, take them out of the country. We are not going to intervene. This goes to the private sector. And then you know what happened? Before that, the money was leaving the country. Whenever you had an opportunity, you took the money out. When the government said, "You want to take it? Take it out." And then money started coming in.

Tobi, it is like I invite you to two parties. In one party, you go there and you can leave whenever you want. And in that one, you can bring your own whiskey. And in the other one, you can come in, but you cannot leave. Once you enter into the party, you cannot leave the party. Which of the two will you go to? If you tell the people you cannot take your money out, people will not bring their money in. We proved that in El Salvador. And there was a war, Tobi. So the problem of the scarcity of dollars stopped just by saying, "If you want to bring dollars, bring them. If you want to take them out, take them out." And then, in net terms, the dollars started coming in. Because people say, "If I'm going to invest, I will try, I will bring dollars. And if I want to take the money out, I can take the money out. And if I want to have interest rates paid abroad or whatever, I will be able to do that." So the first thing, I would liberate the market. And the second one is the other rule I gave you, because we reduce inflation without dollarisation. What we did was we forbade the central bank to lend money to the government. Period. And we complied with the law. That was it.

Because, for example, Argentina has done things like this, but they don't comply with the law. It's the same as not having a law. It is worse. It is actually worse because then you are destroying the rule of law. So it's very simple. For me, the political economy of development is very complex, it's very interesting. It has to do with education. It has to do with opening ways to the world but keeping the economy stable with the inflation rate low and without problems getting dollars is very simple. You don't need an economist for that. Anybody can do it. You call a driver and say, "The only thing that you are going to do is not allowing the central bank to lend money to the government." Period. And then if he does that, he could be a barber, he could be a dancer or whatever, and he will stabilise the country.

Tobi;

Still about reforms, and it goes back to your first answer, which is that as a policymaker, you have to make some very hard decisions, some tough decisions. Reform packages have to be sequenced and well coordinated. So how do you make the trade-offs if you are trying to stabilize a country and get it out of an economic crisis and facing all these problems like you did in El Salvador, a currency crisis, high interest rates, high inflation, high fiscal deficits. What are the quick wins, the first two, three things that you can do?

Manuel;

That's a good question because you say, what are the first ones? Because it's a process. What I would advise, go for the low-hanging fruit, the things that are easier to do. Because if you succeed in doing that, then people will trust you and then you will be able to do the more difficult ones. So in that sense, I think that the simplest thing, simplest, I'm not saying easiest, will be to stabilise the economy. Because it's a simple thing to do. But then look at what is happening in Argentina. You have to do it in a way that you don't destroy the country while stabilising the economy. Because if you just stop printing money or just reduce the fiscal deficit to zero and then it happens that you cut education expenses or you cut the money for the hospitals, as it is happening in Argentina, then you are killing yourself. You are taking a medicine that will kill you in the long run. So what you have to do, I think, is to structure a very good plan so that you can reduce printing money but you don't have to cut all the expenditures immediately. You can go down in expenditures choosing not the most important things. But also you mentioned corruption, there is a lot of money that goes with corruption. So give yourself time, let's say, two or three years to reduce the expenditures in a way that will not reduce the rate of growth of the GDP by reducing corruption, by improving the efficiency of government expenditures. I'm sure that you can probably cut your budget by 50% without really affecting the growth of the country because the resources are being wasted, because there is corruption, and these kinds of things. But you cannot do that in one go because you have to understand how the government is working and then you reduce the waste. So you need some financing during those two or three years and then borrow. Borrow abroad. Borrow abroad, not inside the country. Do not create currency. And then you are going to get money to do that if you present a very good plan. If you show that you have done your homework and then you have calculated how you are going to reduce the expenditures and so on, then you can do it. And I think that is the first thing. Also, you can easily liberalise the exchange rate and the foreign exchange markets. You say, "Well, the central bank is not going to intervene." The price of the currency will be set by the market and you can take the money out if you want. Do it. The currency will not go out. It will come in. You will see.

Tobi;

You talked about having a good plan and one that reflects having done your homework. Which then brings me to my next question. Earlier, you talked about investing in people and human capital generally. And sometimes I do wonder about the human capital in government itself, even at the most senior level. So I would ask you, what are the qualities, intellectual and psychological qualities, that make a good policymaker?

Manuel;

You know, I could bet, Tobi, that you have good people in Nigeria.

Tobi;

Of course.

Manuel;

The thing is how you are going to identify them and get them. But I agree with you that it is fundamental to bring the best people to work in the government, best people in terms of education, in terms of common sense, and in terms of being honest, not corrupt. I'm sure, because for all the waste and for everything that happens, I'm sure that you have very good engineers, oil engineers. You have very good... it's a big country. You must have good people and then bring those people to the government because you don't need to change everybody. You have to change the key people, the people who are going to manage the government, the big policies and so on. And then they will introduce discipline in their own ministries and state-owned companies and so on. You don’t have to change everybody. I'm sure there are many people there who are very good engineers, but they are not producing because the bosses are corrupt or something like that. People have to understand that you cannot arrange all this in one go. The important thing is to start growing consistently, like Singapore.

Tobi;

There's so much I would have loved to talk to you [about], but maybe sometimes we'll find some time particularly on sovereignty and globalisation and your excellent book with Benn Steil. But before I let you go, a couple of quickfire questions. Economics, the field of economics, is getting a bad rap everywhere these days. What has your own experience as an economist, especially in areas of policymaking and the influence of economics on policy generally, what has your own experience been? What are the good and the bad of the influence of economics and policy? And also relatedly, did your earlier education and career as an industrial engineer make you a better economist in any way?

Manuel;

Yes, well, of course, economic theory is very important. It's basic. But the most important thing is to be pragmatic. I am an economist and I am an industrial engineer. Engineering puts you in close touch with reality. If you are going to be a good economist, I think in one way or another, it could be engineering, it could be some other thing, but you have to keep yourself close to reality. That's number one. And number two, never believe that you know everything. Because, for example, I worked with the Soviet Union. I remember many people from the West were coming to the Soviet Union to give advice. And before they left Washington, they knew what they were going to tell the Russians, before knowing Russia. I always found that absurd. You have to approach your work with humility, you know, because normally, what I have found is people themselves give you the solutions. If you know how to ask questions, if you explain these things, if you work with them, then you will find solutions that are workable. You don't want to have economists that come here from any other country to apply the solutions they have applied over there, just like that. Because every government, every country has a difference. You have your own nature, the way things work. And then there are things that you do better than your neighbours also. So if you really know a country, you can produce much better solutions.

Tobi;

Final question. And again, this is a bit of a tradition on the podcast. What's the one idea that you would like to see spread everywhere? It may be your idea. It may be from someone else. It may be from something you've read. But what is that one idea that you would like to see spread everywhere, have a lot of influence, and get people excited?

Manuel;

The best thing that you can do is invest in your own people. Invest in their education, their health, because human capital is not the product of growth. Growth is the product of human capital. The thing that you have to do is educate your people.

Tobi;

Thank you very much, Manuel.

Manuel;

It's been a pleasure.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com/subscribe

Tiago Santos joins Tobi on this episode of the podcast to discuss Parliamentarianism. Tiago believes that if African countries had adopted parliamentary systems during their democratization wave, they would have likely seen better development outcomes, citing the success of Botswana and the economic growth seen in parliamentary countries. He also highlights four main flaws in presidential systems according to political scientist Juan Linz: lack of clarity in authority, rigidity, winner-takes-all nature, and personalism. These issues often lead to ineffective governance, coups, and excessive polarization, which hinder development and political stability. Tiago further argues that better governance structures, like those provided by parliamentary systems, are crucial for economic development. He emphasizes that parliamentary systems lead to greater political stability and more inclusive decision-making, essential for fostering long-term growth and escaping the "Malthusian Trap."

Tiago Ribeiro dos Santos has been a Brazilian career diplomat since 2007. He has a law degree from Pontifícia Universidade Católica in Rio de Janeiro, a professional degree from Instituto Rio Branco (Brazil’s national diplomatic academy), and a master’s degree from the University of Chicago Harris School of Public Policy. He is the author of the excellent book Why Not Parliamentarianism.

None of the opinions in the interview reflect the views of any institution he has been associated with - and you can find the full transcript of the conversation below.

Transcript

Tobi;

You're, I would say, a strong advocate of parliamentarianism. I wouldn't call myself a strong advocate, but I'm fairly biased towards your point of view and became even more convinced when I read your book. Particularly in Africa, a couple of countries went through long periods of military dictatorship. And around 20, 25 years ago, there came another wave of widespread democratisation on the continent. What happened was, maybe due to the influence of American foreign policy or some other global forces, a lot of these countries opted for the American-style presidential system. And in my own observation, maybe I'm wrong empirically, a lot of these countries, my country, Nigeria included, struggled with the workings of this presidential system, such that there had been constant agitation for a kind of return to the parliamentary system that Nigeria had immediately after independence. My question to you then is that, are you willing to say or assert that perhaps if a bunch of these countries around 20, 25 years ago had opted for parliamentary system, would they have done better development-wise?

Tiago;

I don't think anybody can say for sure, but I'm convinced that they would probably, very likely, had done better. With respect to Africa, I think, yes, there is a strong influence from the American model because it's obviously a very successful country. So it's very easy to model after them. But I think that there is something else also in the choice of presidentialism by African countries. I've read a paper by James Robinson and Ragnar Torvik that argues that there is a tendency for endogenous presidentialism, which is that exactly because in presidentialism the leader has more chances to exert their powers without much resistance. So back in the 60s, a bunch of countries in Africa, I think most of them, had a parliamentary constitution, not only Nigeria, but many other countries had a parliamentary constitution and basically all of them switched to presidentialism at some point. If you look at Botswana, the economic performance that they had since the 1960s is very impressive. I wish Brazil had the rate of growth that Botswana has been experiencing consistently. So looking at the countries in Africa that have adopted parliamentary constitution, I think that it would be the case, yes, that had these countries adopted a parliamentary constitution back when they democratised again, they would probably have done better.

Tobi;

I mean, Nigeria is so loud. that the word restructuring, which is a shorthand for reconstituting the political system, is so common in political parlance and, you know, we kept shouting restructuring, restructuring, and it never really comes to pass.

But given the ubiquity and the allure of presidentialism, at what point, particularly historically, did you become convinced enough to write this book about the superiority of parliamentary systems?

Tiago;

It wasn't something that particularly interested me during the first 40 years of my life, before writing the book. So I wrote a book on the economic effects of the Brazilian Constitution. So the idea was to make this research and check every article of the Constitution, what economic effects we could expect to have in Brazil with my then boss, Otaviano Canuto, in the Brazilian constituency in the Board of Directors of the World Bank. And one of the things that I started researching on was exactly the difference between presidentialism and parliamentarianism. And I started to find some striking results. This was too big to go into the article, so we don't mention it in the article that we published. We mentioned other aspects of the Brazilian constitution, but then I couldn't stop researching this. And I was always also checking myself, trying to push my good economist friends. I was trying to also get comments from many people that have thought about this problem very well and to check that I wasn't thinking something that was completely out of base. And I was increasingly convinced because of the feedback that I got, the continuation of my research, it was then when I combined all the elements that I think are in favour of parliamentarianism that if we just look at countries that are parliamentary or countries that are presidential, you see that parliamentary countries perform better in just about any indicator.

If you look at the history, if you look at the informal theory, if you look at formal theory from economics, if you look at the evidence that people try to do with studies that are not just correlational, but that introduced good statistical controls for things, If you look at complementary evidence from companies - so companies can adopt a parliamentary model, which is having a board of directors and this board of directors can control the CEO. And no company elects a CEO by the shareholders directly. And this CEO will have a checks and balances relationship with the board of directors. This figure doesn't exist. And I think the market is in a very good position to choose the best arrangement. And finally, the council management system in the U.S. that I learned when I was doing this research is a system that is very similar to parliamentarianism. And cities that adopt the council management system perform much better than cities that adopt a strong mayor system, which is similar to the presidential system.

Tobi;

So what are the key flaws that you mention in the book? Perhaps there's more now since you wrote the book. What are the key flaws in presidentialism that you think a parliamentary system addresses effectively?

Tiago;

We were discussing before you started recording. I don't try to be original in my book. I try only to convey the knowledge that's already there. And in this, the most influential thinker is by far Juan Linz, a political scientist. And I think that he has the best frame for this. And he talks about four main flaws in presidentialism that parliamentarians doesn't suffer from. So these flaws are in presidential countries, you don't have a clarity of where the authority lies. So what happens in the end is if you like the policy that Congress is trying to push, then you will stand on the side of Congress and if you like the policy that the president is trying to push, then you will stand on the side of the president. And there will be lots of undermining of initiatives by both the Congress and the president. They won't agree on many things and it will be difficult to have a coherent proposal. Daniel Diermeier has an article on this, on how parliamentary systems are more cohesive.

So the second thing I think is a big problem, also from Juan Linz, is the rigidity. So if a country is presidential and the president is working badly, there's nothing we can do. We just have to wait for the mandate to end. And if this is bad enough, if some sectors of society perceive this to be bad enough, you have often coups that derive from a perception that there's no way that the president can stay in place. And then a majority of the powerful actors in a society will install a coup. So that's why the prominence to coups in presidentialism is so much greater than in parliamentarianism.

Then you have a winner-take-all situation. So if you win the presidency, you have so much power that you will be able to implement so many things and you have almost complete control over so much of government. Whereas if you are the losing side of a presidential election, then you are out of government completely. So there's too much at stake. And this incentivises the kind of polarisation that we see in many presidential countries, a type of politics that is very visceral, that is very combative. That's not the kind of politics that we would hope for. And lastly, it's personalism. The presidential system focuses way too much on the figure of one person instead of different institutions in society, different sectors and different voices. And it's often the case that in many presidential countries, people don't love the candidate that they see. They would never support that candidate if not for the reason that they hate the other candidate that will have so much power. And then they try to minimize the flaws that they would never accept in a normal situation on the candidate they support. And this leads to a race to the bottom sometimes. So the personalism is a disastrous characteristic of presidentialism, too. So I think the Linz framework is still the best description.

Tobi;

Yeah. Two common pushbacks that I get when I try to discuss parliamentarian systems whether amongst friends and other people so i want you to help me respond to them is that first is the issue of capture of the political system. So most presidential system have what we call term limits. In Nigeria, in the U.S., and some other places, you say, oh, a president can only serve two fixed terms concurrently. And after that, it becomes unconstitutional. Even though some countries, their president have successfully overturned constitutional time limits to become de facto dictators. But, I mean, let's leave those aside. Whereas in parliamentary system, it's possible to have the same party, the same ruling coalition in government sometimes for decades, right? So what is the nuance between something like presidential term limits in the presidential system and the prospect of having the same, basically, the same government in power for decades? How do those two systems compare in that regard?

And the second pushback I get is stability. The recent case that comes to mind is the Netherlands, for example. They had an election recently where a controversial candidate and party basically won the election. But at the end of the day, it became impossible to form a government, which is what you don't get in a presidential system. The system is such that there is the emergence of a clear winner who then forms a government and then proceeds to govern. Whereas in some parliamentary systems, in some cases, you can have this persistent chaos for a while, like in the UK now where they've had at least three prime ministers in about six years. So those two push back, how do you respond?

Tiago;

With respect to the first, I think there's a strong consensus in political science that term limits actually are a negative quality for an institutional system, because if you recall in the book, I discuss a model by Persson and Tabellini, two economists that studied this question. And they are the only model that I know of. For the only model that thinks that presidentialism is superior to parliamentarianism, one of the most important characteristics is that there are no term limits. Because the idea is that if there are term limits, then a president will try to grab everything that he can before he loses power. Or try to stay in power forever by demolishing the democracy completely. Because he knows that he will never get a chance to be in power once again.

Whereas in the parliamentary system, there is no ending to what he can do. He can stay in Congress, in Parliament, for as long as the people want him there or her there. So what I would say is that even though there are some countries where you see that happening, that some parties stay in power for decades, they are pretty rare. It's not a very common situation in parliamentarianism. And one thing that I stress in the book is that you cannot expect there to be a guarantee that it will be better, you just have to have an expectation that it will be better. So you have Japan, you have Botswana, they are countries that have parties that stay in power for long. You see that even though these parties stayed in power for long, there was not that much repression of the opposition. And in many cases, at some point, the opposition did win an election.

Whereas in presidentialism, you also have cases where parties have remained in power for very long, like in Mexico. So this particular problem that you point to, I don't think presidentialism solves. And the other thing is that sometimes for the opposition to gain power, they subvert completely the regime. They change the constitution. They get into power by force. So even though there was a change in power, it wasn't a desirable one. So for that, I think one of the advantages of parliamentarianism is exactly that it doesn't need to have term limits because any presidential country will have term limits, at least on the president. Because if you do not have term limits on the president, the chances that they will stay in power, be reelected indefinitely, and thereby destroying the democracy are very high.

So since it was invented, presidentialism, you have that problem. With respect to stability, I think that we need to look to what kind of stability that we want. So I think that presidentialism has an illusory stability often. Because you have the very clear legal mandate for the president and the president has a very clear legal mandate to name whoever he wants to government. And of course, one person will always be able to name a cabinet. You have the illusion that there is a functioning government. But this functioning government will be very often completely disconnected from the true forces of society that want to move in a different direction. Whereas in parliamentary governments when there is disconnect, when there is this fight, it becomes apparent and sometimes you have shuffling of cabinets, very frequent. Sometimes they are not frequent at all. You can have Angela Merkel in Germany that stayed in power for some 20 years, and then she left like nothing happened. It was a very smooth transition. And so parliamentary has this flexibility. If something is working, then they stay in power for very long. If something is not working, they don't stay in power.

And you mentioned the Netherlands. I don't know about the Dutch situation right now, but I recall that Belgium also was without a government for a while. And when we say without a government, we really mean without a cabinet. It's not that there is no government in Belgium. They're still doing all the things. There's still police, there's still courts, there's still schools. So I think that if there is not enough consensus in a society, then not having a cabinet pushing for policies might be a good thing. And if you look at the Netherlands right now, I don't think it's chaos, right? I think it works very well, as Belgium did, still worked very well, even when it didn't have a cabinet. If you look at the Netherlands is one of the most successful societies in history and is still one of the most successful societies right now. So I would never describe their situation as chaos. So what I would say is that, well, if we have to deal with situations where there's no cabinets, then fine. I'm not as bothered by that as I am by a lack of basic sanitation or a lack of economic growth or a lack of health services or a lack of safety in streets, that sort of thing, which presidential countries have much less than the Netherlands.

Tobi;

I would like to stretch that point a little bit. So perhaps it's a good thing that the Netherlands has a parliamentary system and that they are in their current equilibrium because the party that won the election and the individual vying to be prime minister is controversial, is internationally disliked and has some positions that are quite disagreeable. But it's also easy to imagine the opposite. where his party his platform his ideas and his policies might actually turn out to be excellent for the country and for the region and perhaps influential enough for the world but here you are in a system that prevents that person from getting to power. So i'm trying to gauge how earlier, many three systems respond to the good leader, bad leader argument because some would say one of the strengths of the presidential system is if you're lucky enough to get a good leader, he or she can then use all that power, all that legitimacy to then drive transformation and growth and all the good things to the maximum and transform the country within a few years.

What's your response to that?

Tiago;

First of all, I don't think countries have been lucky enough that we would still bet on that. If we look at the history of presidential systems, the evidence shows very clearly that this hope for a very good leader, it's like playing the lotto, I think. The chances are very small. And I think that even if you had a person that had all the vision and the capacity to implement very good policies, if he doesn't command enough support in his society, there will be sabotaging, there will be opposition, there will be people that have capacity to interfere with society, trying to undermine his efforts. Even with this great leader, you wouldn't have the great outcomes that one would expect. So I think the crucial thing, and I think it's central to democracy, is exactly that there is a wide consensus. The thing is that presidential elections do not create wide consensus. They create two rival candidates, two rival sides, and then at the end of the day, one of them wins. And this goes to late[r] part [of the book], which stressed the importance of consensus, the capacity to take into consideration the interests of different sectors of society at once. So this is why I still like parliamentarianism better.

Tobi;

So for the benefits of people that haven't read the book, I'll go through perhaps a few more questions that you should explicate on before I go into what actually interests me, which is how you then relate your argument on parliamentary systems to development or economic development more broadly. So one thing I also want you to clear up is you talked about corporate governance and how they are better under parliamentary system. Can you elaborate on that a bit?

Tiago; 

So corporate governance, we usually think of governments and companies as completely different walks of life, completely different situations. But in fact, they are not. So governance is not a word that came about by chance. It does come from the same principles. And when you look at how boards make decisions, they use something called parliamentary procedure. They use some books like Robert's Rules of Order, which is taken by, I think it was a colonel, it was someone in the military that was very frustrated by how meetings were being used and then he used exactly the sort of decision that was being taken in the United States Congress to take these decisions. And we see, I forgot the name of the author right now, but this book, Shareholder Democracies, he explains how the modern public company takes a lot of how it's governed from the evolution of government, particularly because there was a time that the modern company was started in England.

And there was a time when you would need to have authorisation by the government to create one of them. And then the board members would be often people from government as well. So there was this very intense relationship and this very intense exchange of methods of approaches to problems. And then they had tried many things, many approaches, boards with lots of members, boards with very few members and all sorts of ideas until they ended up with the model that is replicated in basically every public company that we have now, which is the shareholders elect a board of directors, the number may vary, and this board will choose the management of the company, particularly the CEO, which will be kind of like the prime minister, but maybe different from the UK, because in the UK, the prime minister must be from parliament. But in the Netherlands, for example, it doesn't have to. But the board elects the CEO and then they can fire the CEO at any time as well. So this is something that allows for a much more efficient handling of the affairs of the company than the situation where you would have the shareholders elect the CEO themselves. I wrote to one of these authors about this parallel, and he thought it was perfectly applicable… “And yes, yes, I completely understand what you're saying about the presidentialism.” He couldn't think that it had ever been tried by any company, the exact presidential system. One thing that was tried is the shareholders choosing some people in management already. And this didn't work. So I think that this is very strong evidence for that because markets, they have the greatest incentive to perfect their governance systems.

Tobi;

What is the attenuation bias and how does this bias feed into our common understanding of presidential and parliamentary systems?

Tiago; 

So attenuation bias is something that I put in there because when I was discussing this during the process of writing the book, I got a lot of pushback by people. And recently I also had one pushback by people saying, well, but it's hard to classify countries in presidential or parliamentary forms because there are many types of intermediate situations. So you have semi-presidential countries in Africa. We have lots of semi-presidential countries where the president has power, but the prime minister does have power too. So there is this combination where not everyone agrees about which countries should be considered parliamentary or presidential. And also many other political scientists first need to decide if a country is a democracy or not and then classify it as presidential or parliamentary, because they say if it's not a democracy, then it doesn't matter what the Constitution says. The dictatorship can do anything it wants. The Constitution doesn't have any bite.

I disagree with that view. I think that constitutions matter even in situations where you don't have a full democracy. But in any case, people would be saying that this would make the results in terms of stability, political stability, in terms of economic growth, less strong. And then I argue the exact opposite, which is the attenuation bias is the mathematical fact that when you have noise in the explanatory variable, the effect that you see will be smaller than the real effect. Whereas if you have noise in the explained variable, the dependent variable, there's less precision, but the size of the effect is in expectation the same as the real effect. So what I argue is that, yes, there are debates about what countries are parliamentary, what countries are presidential. And if this is hard to classify, then we should expect the effects to be even larger. Many people criticize academics and scholars that raise the issue of attenuation bias because people often raise the issue of attenuation bias even before they convincingly demonstrate that there is a relationship in the first place. But I think that at the point where I make the point about attenuation bias in the page that I make that, I think that I was able to demonstrate that the relationship does exist. So if it does exist and we do have difficulty classifying countries in parliamentary or presidential, then we should have attenuation bias and we should expect the effects to be even larger.

Tobi; 

I would say how your research, your writing, your argument does relate to economic development, or maybe development for shorthand, is what I found most interesting in your book and most relevant to my passion. Because I don't know if you caught this yesterday, Jishnu Das, I don't know if I'm saying that correctly, wrote an essay titled, let me quickly check, "Did Development Economics Lose Its Moral Compass?" Yeah, you're not making similar arguments, but how I see them connected is the fact that development, the field or the development industry has more or less given up on governance. And now everybody is obsessed with whatever tiny interventions you can make that get people from $1.90 to $2.90, and then we can sing hallelujah that we've ended poverty. Whereas I, and I imagine yourself and some other people that we both admire, like Lant Pritchett, are interested in changes that we can make in Nigeria, in Chad, in Ethiopia, that can get those countries to middle-income status and possibly greater than that. So how do you see the relationship between economic development and the system of governance or the political system generally? How does this tie in your head when you were writing the book?

Tiago; 

Okay, so I think that in theory, we should expect this to happen. When we look at the institutional school of economics, they say that the central aspect for growth is institutions. So you go back to Douglas North, you go to Acemoglu and Roderick and those people, and Douglas North in particular. Not all institutionalism put the emphasis that North puts on parliament and he puts because he sees that as protecting property rights, specifically. And I think he goes for too narrow an approach. But if you look at the consensus that there is around institutions being central to economic development, and the consensus that there is in political science that parliamentarism is central for political stability, and if you just connect the dots and say, well, political stability must be important for institutions to work well, right? If you just connect these dots and think that also, if institutions are key and a country doesn't even have political stability, will it have capacity, which is something that Pritchett talks about too, about state capacity for many other things. So if it isn't even able to have stability, will it have the capacity for development to be promoted? And I think not.

And then, going back to Pritchett once again, one thing that I talk about in the book is the Pritchett test. I learned this from Paul Romer in a blog post. He mentions that urbanization passes the Pritchett test. And this is a series of requirements that don't seem to be very stringent, but that Pritchett proposes that any policy that you say will have development should pass this test. And this was relating to the frustration that you were talking about that you have and that I share. And I think that he is the person that talks about this best, which is we are promoting very modest, very unambitious proposals that we don't think would possibly have an effect. And then the test is this. In a cross-sectional comparison of levels, do countries that are more developed have more X? And this is easy. I showed this in the beginning of the book, that parliamentarism does have many more developed countries than presidentialism. There are much fewer presidential countries that are rich or developing in any way.

And then he goes in a cross-sectional comparison of growth rates. Do countries that have rapid growth also tend to experience a rapid increase in standards of living? And I present evidence that we do have that. In my blog, I have a post on how parliamentarism passes the Pritchett test. When we look at the few countries for which we have long historical records, do the ones that become much more developed also acquire much more access? And then we see, this is very interesting, that it's exactly in the two countries that first parliamentarize in Europe that we see the end of the Malthusian Trap, the escape from the Malthusian Trap. So it's the Netherlands and the UK, in England. And then this parliamentarianism spreads around Europe and then Europe itself becomes much richer. A very parliamentary tradition establishes in the U.S., so we tend to think of the U.S. as much less parliamentary than it really is. And you have Canada, you have Australia, you have New Zealand, they are countries that for more than 200 years have had this sort of constitution and also have done very well.

And lastly, if we look for countries that switch from a regime of slow economic development to a regime of rapid development, we see a prior shift. So this is for us to think of this just conceptually. And then we have some studies that show a very strong connection of growth and parliamentarianism. So we have Gehring and other authors from 2009 that shows stronger growth in parliamentarianism. And we have one specific study by Richard McManus and Ozkan from 2019 that shows much stronger growth in parliamentary countries from 0.6 to 1.2 percentage points per year, which is huge. And it would explain a country being developed. If a country did grow 1.2 percentage points per year in its per capita GDP, it would become developed over time, of course, but it would be enough. So that's why I think that the connection between parliamentarianism and development is very strong.

Tobi; 

I guess what I'm trying to get a sense of from you, you're a career diplomat, you've been in some of the rooms where some of these decisions are made, what has become so broken about development in general that we've stopped being ambitious in the sense that trying to change your political system can actually get you more benefits development-wise than whatever tiny little cash transfer you're doing in whatever village in Kenya or Nigeria or… how did development become so unambitious?

Because one of the points you touched on in the book is this fallacy of having tried everything, you know, and, oh, so this is what we have… because the state of particularly development economics for me, the state of things are so terrible in my view. The so-called evidence landscape has become so broad that you can find evidence for anything. For example, if I'm the president or the chairman of a local government in Nigeria and I choose to not fix the road, for example, or choose not to build a power station, I would rather take a fraction of that money and do a cash transfer program. I will find evidence and possibly researchers that will tell me that that is a good thing. So how did development become unambitious from your vantage point?

Tiago; 

I think that's hard. That's something that I will speak with, but without as much conviction as the other things that I'm saying here. But I think there are some different processes going on. One is the idea that there have been some, we haven't tried everything, but we have tried some things. And these things, these specific things that we've tried, the big push theory and some other things like that, did not work out as expected. And then there was this too quick giving up on trying other things. I think there is a fear of being perceived as a failure on part of policymakers, so they would rather be unambitious than being perceived as a failure. And I think that has been married to an academic predilection for precision. So academics are more preoccupied by doing the randomised trial and getting the precise estimate of the effect of something. And then they only care about it being significant in the statistical sense and not on the practical sense. “Oh, this is statistically significant. It makes a difference. Then let's do this.” So I think that these two tendencies have worked.

And lastly, one thing that hopefully I'm not being too centered in parliamentarianism, I think that the fact that we have forgotten key benefits of parliamentarianism has made us look basically anywhere else instead of here and this has consequences because I think that a society that does not have the correct, the best institutions for it to develop will have a very hard time and then any policy that is tried will be perceived as a failure because they don't have the conditions that allow the society to really develop.

Tobi;

I don't want to dump all my frustration about development on you. So let me move on from that.

So practically speaking, now, suppose you get a few elites, leaders in your country that are ambitious and courageous enough to want to make a change from a dysfunctional presidential system to the parliamentary one. What are the useful key elements steps that can be started without tearing their political system apart? Because a lot of the fear also comes from not causing too much political turmoil or alienate an influential group that can then go ahead and form chaos in society. So what are the useful first steps you can take towards parliamentary governance?

Tiago;

So I talk a little about in the book what one can do. And as I said on the last part, these are things that I'm not as sure as I am that parliamentarianism is better. On the how we implement it, I have much more doubts, but I still have some suggestions. And I think that we should try to make the proposal of parliamentarianism similar to the proposal for democracy. Because when you ask for more democracy in a country, it's very rare that anybody will push back. “Oh, this will rock the boat here. Our country doesn't have a strong tradition of democracy, so we should just keep without tradition.” These are not arguments that are accepted by someone that's promoting democracy. They say, “no, no, this is a better situation because this will be able to really convey it the will of the people, so it's not a matter of tradition or not.” So what I would do is try to make this conversation within academic circles, with journalists, with policy makers, and that type of person, because I think the things that do get implemented, they are downstream from these people. I don't know if you read the Stefan Dercon book, Gambling on Development?

Tobi;

Yes, he was also a guest.

Tiago; 

He was a guest too?

Tobi;

Yeah.

Tiago; 

Oh, that's great. I’m in very good company. So he talks about the importance of an elite bargain for a country to find development. In this sense, I would mention the book to convey the importance of trying to convey this through the elite. I don't think it's as disruptive as we make it to be, because if you think about it, think the issue with presidentialism, the winner-take-all. In the winner-take-all, it means that for a presidential candidate that loses the election, it might very well be the case that losing the election has more negative consequences for them than actually switching to the parliamentary system. So he will expect to have a better participation in the political system of his country if they switch than if he loses the election. And I think this is very true. And I see politicians in many countries are favorable to parliamentarianism. In my country, I see that the politicians are the easiest class to convince. I think that because they live it, they know how dysfunctional presidentialism is, and because they perceive that they would themselves benefit. So they are the easiest class. I think that the journalists and the academics in many of these countries are much harder to convince.

In Brazil, it's definitely the case that this happens. So even though there is this strong consensus regarding the superiority of parliamentarianism in political science in the US and in Europe. In Brazil, we don't see anything like that. The political scientists in Brazil are very skeptical of Linz and other authors and there's specifically a Brazilian scholar that's very influential that tries to undermine Linz's arguments. I think that he doesn't do it satisfactorily. But this is how I would do it. And then, I don't know, I think that we should try to do the things that we do for other causes that we see. So climate change, what do people do for climate change when they try to fight climate change? They create think tanks, they create campaigns online, that sort of thing. That's what I miss.

Tobi;

So, I mean, if you look at the world today, especially the trend in global politics with the rise of populism, nationalism, trade wars, the state of global governance generally at institutions like the UN and the prospects of cooperation between the EU, the US, China, Russia, and what is called multi-polarity generally, do you think that parliamentary systems put global diplomacy on a better, steady footing?

Tiago;

I definitely do, yes. And this makes me sound like, oh, I think it's a panacea. It's a problem solver for all things. And anticipating that, I would argue that it's actually presidentialism, personalism is really bad. And when something is really bad, it can harm you in every area of your life. So parliamentarianism solves the problems that presidentialism causes. And with respect to diplomacy, we see that the democratic peace theory is one of the most, I think, the single most established empirical fact in international relations, that democracies don't fight each other. And there are some attempts at trying to make this look not as solid as it is, but it's widely perceived as the most important empirical fact in international relations. And if we think that parliamentarism is so central for democracy, for the democracy level, for democracy duration, then I think that it becomes very clear that parliamentarism will have this effect.

And I think of a book written by Chris Blattman, a professor at UChicago [University of Chicago], Why We Fight. And then he explains the few reasons why countries will fight, because he argues very convincingly that conflict is much rarer than we try to make it to be because the news cycle is so prone to publishing on conflict. But conflict is rare. And then there are several failures that are related to countries fighting. And many of them relate to a country being presidential. So one of the failures is that the government does not reflect enough the will of the people. So the utility function, more or less, the interests that the government is taking into account is not the interests of the population as a whole. So it may make sense for the government to fight a war, even though it will be disastrous for it’s own people. And parliamentarianism is supposed to better convey the interests of the people of a country into government much better than presidentialism does. So this is just one example. And just a better functioning government also will help in diplomacy.

Tobi;

I'm curious, as a way of steel manning your argument, what is the one critique of parliamentary systems that you find persuasive?

Tiago;

Many people ask me that. I have a hard time thinking of something. So the one thing I really think is that it's very counterintuitive. It's something that people just have a very hard time accepting that might be true. People would like to have a good leader and they would like presidentialism to work. So it's very unpopular. It's very hard to convince people that this is indeed the case. I think that it's a lot like, I don't know, like markets in general. I think that people are suspicious of markets in general when they shouldn't be. And I think that parliamentarianism has this flaw. But on a performance level, I really can't think of anything. I know this makes me look like more of a radical than not. But I've looked for it and I couldn't find it.

Tobi;

Final question. This is also a bit of a tradition on the podcast. By the way, you're not allowed to say parliamentarianism. What's the one idea that you would like to see spread everywhere? It might be your idea. It might be from something else. It might be from someone else. What's that one idea you like to see spread around the world? You like to see people get passionate about?

Tiago;

Opening borders. That's one thing that I think would have a huge effect.

Tobi; 

So you're very much a card-carrying member of the open borders movement.

Tiago;

I am. I think that, yes, as I said, I'm a fan of Pritchett and others too, Bryan Caplan, Alex Nowrsteh. There are many people, Michael Clemens, there are many people that are working on this. The economic effects of opening borders would be just transformative, double GDP, according to the Clemens estimate. And that would happen exactly by helping the people that are the poorest. So it would also have a great distribution effect. So I think that it's a policy that I would definitely like to see being more discussed on high levels.

Tobi;

Thank you so much, Tiago Ribeiro Santos, for talking to me. It's been wonderful.

Tiago; 

I thank you, Tobi, for the opportunity to talk about these ideas and congratulations on your work. And let's hope for more ambitious developing ideas.

Tobi;

Yeah, thank you.

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