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 bei…

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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 cu…

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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 …

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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, somethi…

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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

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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,

(00:04:45):

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.

(00:04:53):

I think that is a huge problem.

(00:04:54):

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.

(00:05:04):

Because I think ultimately,

(00:05:06):

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,

(00:05:15):

in some ways can be a major source of instability.

(00:05:17):

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,

(00:05:29):

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.

(00:05:36):

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

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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 sec…

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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 marke…

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 man…

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