Over the past 40 years, the field of behavioral economics has emerged to explain why humans make irrational decisions. We talk with one of the pioneers of the field to find out what’s behind the choices we make, and how we can use this knowledge for good.
The global economy has changed. The poverty and inflation that once plagued developing nations like China and Brazil have become things of the past. Yet, their stories of economic turnarounds could provide the key to recovery for historically rich nations, like the U.S., that today are strapped with debt. As Republican and Democratic lawmakers debate how to get the federal budget back on track, Kojo explores the lessons they could draw from the developing world.
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. For most of the 20th century, the world could easily be divided into two groups, the haves and the have-nots. So-called First World nations in Europe and North America built up their middle class and raised their standards of living while countries in the developing world, the Third World, fought debt, inflation and poverty.
MR. KOJO NNAMDIBut somewhere over the last two or three decades, that global landscape began to change. Today, it's rich countries limping through the aftermath of the great recession and grappling with the prospect of crippling debt while countries like Brazil and Mexico are growing their middle classes. In his new book, Peter Blair Henry argues that American policymakers could learn a thing or two from their counterparts in what was once labeled Third World.
MR. KOJO NNAMDIHe joins us in studio. Peter Blair Henry is dean of the New York University's Leonard N. Stern School of Business and the author of the book "Turnaround: Third World Lessons for First World Growth." He was born in Jamaica, the Third World, but educated by First World institutions. Peter Blair Henry, thank you so much for joining us.
MR. PETER BLAIR HENRYThank you.
NNAMDIYou, too, can join this conversation. You can call us at 800-433-8850. Have you ever lived in a developing country? How did it shape your views on economic policy? 800-433-8850. You can send email to firstname.lastname@example.org, send us a tweet, @kojoshow, or simply go to our website, kojoshow.org, and join the conversation there.
NNAMDIBrazil's economy was once a basket case. It had soaring inflation, millions of people living in poverty. In fact, it was long cited as having the worst income inequality on the planet, but today, Brazil is a global power with a middle class that makes up half its population. How did Brazil accomplish that?
HENRYA number of things, but I think the really -- the big key in Brazil was a -- what I call discipline, and by discipline I don't mean necessarily the willingness to take extreme measures. I mean a willingness to put a focus on long-term prosperity. And in Brazil, the key step in putting in place this discipline policy was really attacking its inflation problem in the early 1990s.
HENRYSo under Fernando Henrique Cardoso, Brazil implemented a -- what's called a stabilization plan, a plan that basically said we're no longer going to finance our deficits by printing money because printing money generates lots of inflation. And inflation is bad for the poor. It's also bad for businesses because it makes it very hard for them to plan for the future. And once Brazil tackled that problem aggressively and importantly was committed to staying on the path on that anti-inflation policy, things turned around for them.
NNAMDIThe Western world has had an unspoken monopoly on economic wisdom, if you will. Historically, they've been the ones prescribing economic reforms to struggling debt-ridden nations and the developing world. But now, you're saying that the supposed teachers could learn from their students. What can a country like the U.S. learn from Brazil's example?
HENRYWell, I think the U.S. can learn a lot. And if I might just move around geographically just a bit, but still...
HENRY...Latin America, talk about the specific example of Chile. So as you know, there's a lot of debate right now about -- of our fiscal future in the United States. But going back in the past is really useful here. So in 2001, the United States had a record fiscal surplus, $236 billion. And the key to fiscal policy is behaving much like the story from Aesop's fables, like the ant and not the grasshopper.
HENRYThe U.S. behaved like the grasshopper. We had a $236 billion surplus, and we decided to give it back essentially in foreign tax cuts. Chile by contrast in 2008 had a huge surplus, benefiting from the worldwide copper boom and...
NNAMDIThey socked it away.
HENRYThey socked it away, exactly. And so when the crisis hit, they were able to institute $4 billion worth of tax cuts and subsidies, much of which went to the poor to help support the economy. So saving for a rainy day is key. And we seem to have forgotten that lesson.
NNAMDI800-433-8850. Do you think we can learn something from, say, Chile's example or Brazil's example? Give us a call, 800-433-8850. How has the U.S. and other Western nations failed to practice what they preached to the developing world?
HENRYWell, I think a critical -- oh, and I mentioned discipline earlier. But another critical element is what I call trust. And it's -- Third World nations, formerly Third World nations who are using discipline have turned around their economies and become today's emerging markets. And you mentioned Brazil, but let's expand it now from Brazil to what is known as the BRICS, Brazil, Russia, India, China, South Africa.
HENRYThe BRIC countries now account for roughly 20 percent of global GDP. But if you look at the major institutions that govern world financial and economic affairs, the IMF and the World Bank, the BRICS only account for 11.5 percent of the voting shares at those major institutions. And so by failing to acknowledge the success of the turnaround, we are running the risk of undermining -- we undermine trust and undermine the willingness of these nations to continue down what I call the long road to prosperity.
NNAMDIWe're talking with Peter Henry Blair. His book is called "Turnaround: Third World Lessons for First World Growth." He is the dean of New York University's Leonard N. Stern School of Business. You can call us at 800-433-8850 with your comments or questions. The newly-appointed Pope Francis comes from an Argentinean church that has criticized free market policies.
NNAMDIWhen the 2002 economic crisis hit Argentina, his church claimed it revealed the negative effects of globalization. Such critics of globalization often point their finger at a set of controversial economic policies known as the Washington consensus developed in the late 1980s. What is that, and how did developing nations see those reforms?
HENRYYes. So the so-called Washington consensus is a list of essentially 10 policy items that were first unveiled in a speech by then secretary of the Treasury, James A. Baker III in 1985 at a World Bank-IMF meeting in Seoul, South Korea. And to set the stage, in 1985, the Third World was mired in what's called the Third World debt crisis.
HENRYAnd so on behalf of his boss, President Reagan, Secretary Baker went to Seoul, South Korea, to unveil the U.S.'s vision for what these Third World countries needed to do in order to start growing. And that set off a firestorm. It was not well-received to put it mildly.
NNAMDIWell, the view then was that developing -- at least the view in those developing countries was that they were kept in poverty by Western policies, then along comes the consensus and says that, well, you've got to do some belt-tightening here. You've got to do these 10 things. What -- how was that received in developing countries?
HENRYThere was animosity to put it mildly. And again, remember the historical context is that there's this feeling of this is being pushed on us by former colonial powers. And so I think one of the key messages, the key ideas in this book is that, even if the messenger is inappropriately paternalistic, if there's good content in what the messenger has to say, it may be worth listening to.
HENRYAnd so the key thing with the Washington consensus is it's not that countries need to do every item on the list, it's countries need to decide for themselves given our desire to create long-term prosperity whether it be in Argentina or Chile or Jamaica or wherever the place may be, what is there a value in this thinking that we can apply in our way they can help our citizens prosper.
NNAMDIHow can we get pass the ideological debates surrounding these reforms to see if they really work?
HENRYSo one of the things that that I do in the book is to say let's get pass ideology by looking at not what people on the left or the right say about whether economic policies work, but ironically, let's look at -- and I say ironically because maybe people think about the stock markets, which is a tool that I use to actually look at whether people think reforms are likely to create or destroy value, people tend to think of the stock market as the ultimate symbol of the wealthy. But an important point is that what's good for business can also be very good for the poor.
NNAMDIYou look at the stock market not as a symbol for the wealthy, but you look at the stock market to see how the average investor is thinking, and you feel that's very important. Why?
HENRYIt's important because in order to -- in order for firms to be willing to invest in the capital that's needed to productively employ workers, owners of businesses need to feel as though there will be a return to capital. And so if the stock market forecasts that the policy changes that our government is making are likely to create value in the future, then as price -- stock prices go up, it makes it cheaper for firms to make those productive investments, and it encourages them to hire workers, and that can be good for incomes, good for wages and good for employment.
NNAMDIHere we are talking with -- about the stock market and what it can tell us with the dean of New York University's Leonard N. School of Business who apparently embarked on this path because of conversations between his grandmother in Jamaica and a woman to whom she fondly referred as Ms. Mamma. What's that all about?
HENRYSo as a young boy growing up in Jamaica, one of my favorite things to do is to spend time at my grandmother's porch in Kingston. And occasionally, during those visits, we'd be visited by a woman named Ms. Mamma who was a homeless destitute woman, and she would come and sit on the porch. My grandmother would always feed her, and I'd listen to their conversations. And I once asked my grand -- and Ms. Mamma had a very distinguishing feature, she always -- she had a big belly. And I asked my grandmother...
NNAMDIYou were 7 years old at the time.
HENRYI was 7 years old at the time. I asked my grandmother one day after Ms. Mamma left, after being fed by grandmother, I said, "Why is Ms. Mamma always hungry if she has a big belly?" And my grandmother said, "Some people are hungry not because they eat too much, but because they never get enough to eat." And that really stuck with me.
NNAMDIThe reason she had that extended stomach was because she was not getting enough to eat, and that's what caused Peter Blair Henry in some measure to embark on the path on which we are now discussing. Venezuela recently lost its leader, Hugo Chavez. He continually fought against what he saw as the more centrist policies embraced by, say, his neighbor Brazil. Could his death usher in a new era of economic policy in that region?
HENRYWell, I hope that Venezuela will have prosperity in the future. And you mentioned the pope earlier. I think it's -- there's an open moment here. If the Catholic Church, one of the most traditional institutions in the world can reform itself and embrace the Third World -- right, now, we have a Third World pope.
NNAMDIFirst time in history.
HENRYCan't the international institutions, the IMF and the World Bank, seriously embrace bringing the Third World into a much more inclusive conversation?
NNAMDINow that Chavez is gone, here's another problem. The Caribbean nations that were dependent on his oil supplies themselves are facing a period of uncertainty. If those nations don't get the same treatment under a new Venezuelan leader, A, what do you think will happen with their economies, and, B, what do you think they should be doing?
HENRYI think the Caribbean is also facing a difficult time, Jamaica in particular. And there's no secret. We have an expression in Jamaica and it's used throughout much of the English-speaking Caribbean. And the expression is -- I won't say it in the vernacular, but I'll just say it in my normal spoken voice: Long road draw sweat, shortcut draw blood, which basically means there's no easy way to get to the right place.
HENRYAnd I think that that really applies very much to the Caribbean. It's a question of investing in your people, making it easier to do business, but making sure that government is playing the right role in enabling its citizens to benefit from the conditions of a market economy.
NNAMDILet's talk about what the right role for government might be in that situation because in the 14 years that Chavez was president, he championed the causes of the poor, directed a lot of revenue towards programs for the poor but failed to kick-start economic growth. Does a leader have to choose between promoting social welfare and creating economic prosperity?
HENRYNo. And that's the beauty of economics when it's appropriately applied. We can reject the or and embrace the and. And again, I think Brazil is an excellent example of this. So in contrast to Venezuela, which now has an inflation rate of close to 30 percent, Brazil has a single digit inflation and has reduced poverty, brought 20 million people out of poverty over the course of the last decade. So both of these things can happen at once.
HENRYAnd that was the beauty of Lula da Silva when he ran -- when he first ran for office. He ran on what looked like a very traditional, if you will, I use the term or just sometimes use prerogatively, populist platform. But he brought inclusive vision, but he harnessed the markets to achieve that vision. And that is the difference -- and that's turnaround in its essence.
NNAMDIWhat's the kind of belt tightening that Lula da Silva had to do in Brazil that we don't see happening in both First and Third World countries today?
HENRYGreat question. So it's all about, again, a sustained commitment of the future, maintaining low deficits in good times, so that when times are hard, you have money to spend. And I'll give you a very specific example. From 2002 to 2007, we had the fastest period of growth ever in the global economy, 4.9 percent per year, almost 7 percent in developing countries, about 3 percent in advanced countries.
HENRYBut during this time -- and here's the turnaround -- developing countries were saving. They were running fiscal surpluses on average of about 1 percent of GDP. Advanced nations were running deficits. And so when the good times run out, they didn't have a cushion.
NNAMDIAnd that's what happened. We'd like to take a call before we go to a break. Let's try Alex in Washington, D.C. Alex, you're on the air. Go ahead, please.
ALEXGood morning -- or good afternoon, actually. In reference to the idea of learning a lesson from observing what's going on in the rest of the world, I submit that the U.S. doesn't have to learn that lesson -- knows that lesson. The reason they did not apply that lesson is because it has different agenda from the nations that your guest is talking about.
ALEXFor example, Glass-Steagall was not revoked by accident. The grotesque gap between the very wealthy and the rest of us didn't occur because of a lack of knowledge on the parts of the decision makers. Another example is Paul Ryan's agenda is not based on ignorance of its consequences.
NNAMDIYour -- the point that you're making is?
ALEXThat it's -- the lesson is being learned by people in the Caribbean but is not being ignored by accident by the decision makers of the United States. They're deliberately ignoring the lesson that is learned. We know that. We know it's going to make the economy better.
NNAMDIAnd you're saying that the -- I am inferring that you are saying they're deliberately ignoring it because they are interested in increasing the wealth of the wealthy at the expense of the rest of the nation?
ALEXI think that is precisely what I'm saying.
NNAMDIAllow me to have Peter Blair Henry comment on that.
HENRYWell, I think the caller makes an important point. I think that getting to good decisions is the responsibility of both leaders and the electorate. And as citizens, if we're better informed about what other countries have done to turn themselves around and deliver prosperity for the people, then we're in a better position to raise our expectations to those people in power. And so I would say that responsibility falls on both the citizens and the elected.
NNAMDIThere is a comment that you made earlier that -- not earlier in this broadcast, but in what I was reading. Here we go. You told Forbes that "On the domestic front, for all of our recent underperformance, America is one piece of significant legislation away from a very prosperous decade." What specific piece of legislation would that be?
HENRYIf we can come up with a discipline to approach the fiscal policy, provide some clarity about what our priorities are and how are we going to get there in the long term, again, this is about a disciplined approach. It's not about getting from budget deficits today to zero tomorrow. It's about sustained commitment to getting budget deficits down over time and in the clear. But how we're going to do that?
HENRYThen, what we will see, in my view, is a reversal of over the last decade more than half a trillion dollars of investment per year. Investment is done more than half a trillion dollars per year because there's a great deal of uncertainty about the future. I think we'll see companies start to invest again. Companies are sitting on a lot of cash currently. The stock market is up, but companies aren't investing. Investment is about 15 percent of GDP right now. About a decade ago, it was as high as 20 percent. And that is the key to generating much more widespread prosperity.
NNAMDIWe'll see if that specific piece of legislation can come about. We've got to take a short break. If you have called, stay on the line. When we come back, we'll take your calls. The number is 800-433-8850. You can send email to email@example.com. Should a government shield its people from the market, or should the marker have free reign? Do business-friendly polices benefit everyone? What does sound economic policy mean to you? 800-433-8850. I'm Kojo Nnamdi.
NNAMDIWelcome back. Our guest is Peter Blair Henry, dean of New York University's Leonard N. Stern School of Business and the author of the book "Turnaround: Third World Lessons for First World Growth." You can call us 800-433-8850. If you have called, I will be getting to the calls momentarily. But first, Jamaica has a lot in common with its neighboring island of Barbados except when it comes to the economy.
NNAMDIWhile Jamaica floundered in poverty, Barbados' economy soared. How do you explain their different stories because a lot of people make the argument that these countries' pre-colonial history or their colonial history is what, in fact, determines their present and their future? You seem to be making the case not necessarily so.
HENRYYes. So you refer to a very well-respected literature in the academy that says institutions. Basically, who your colonial master was really determines your economic outcomes. And somebody that who grew up in the Caribbean and experienced life very differently in Jamaica, I had the sense that wasn't right. And its economic policies, the choices that are made by leaders have enormous impact within the course of a generation over the prosperity of its citizens.
HENRYIn the case of Jamaica, very well-meaning leaders like Michael Manley, in the early 1970s, made choices to shun the market economy and to follow a state-driven approach that, frankly, ended up badly.
NNAMDIAnd in the case of Barbados?
HENRYIn the case of Barbados, the decision was made to raise the market economy, to maintain openness to trade, to maintain small deficits, whereas Jamaica had big deficits in and around of it debt and made really tough choices along the way. And there's one story in particular that I would love to tell about -- that illustrates this in the context of Barbados. So in 1992, Barbados, which had fixed exchange rate with the United States since the early 1970s, faced recession and financial ruin if it didn't make a choice.
HENRYThe IMF came to Barbados and said, you must devalue your currency because your industries have become uncompetitive. And the leaders from Barbados said, no, thank you. We're not going to devalue our currency. But importantly, people didn't just take to the streets and say, we're not going to do anything. They said, we're going to get together, leaders, the private sector...
HENRY...and unions, and we're going to talk about this. And it was a very difficult protracted discussion 'cause there were protests. But ultimately, the people decided, we're going to take a 9 percent wage cut in lieu of the devaluation because we can achieve the same increasing competitiveness by reducing costs through wages rather than the exchange rate.
HENRYAnd employers opened up their books and said, OK, in the future, productivity increases will translate into wage increases, so we can share the prosperity. And by doing this, Barbados was able to reach a compromise, a social compact that helped them move forward on their own terms.
NNAMDIOn to the telephones now. We go to Paul in Annapolis, Md. Paul, you're on the air. Go ahead, please.
PAULHi there, Kojo. Thanks for taking my call. I'm not an economist by any stretch. I'm a physicist. But I am somewhat disturbed by what the author is saying, not in particular, but there's an under an undercurrent, and there's just some mixing of metaphors here. The point I want to make is that to extend what these Third World countries, South American countries, even Europe, to try and extend that to the United States is just wrong.
PAULIf you read Stiglitz, if you read Google demand-side economics, modern monetary theory, Steve Keen, Allen Browne, the concept, the statement he made that printing money leads to inflation is patently false. It's been proven wrong. It's an old outdated conventional wisdom, doesn't apply here. In fact, our economy now runs on printing money.
PAULProblem is money doesn't get to where it needs to go. And so I just feel that we really have to be very careful about making extensions. The U.S. government in not like mom and pop sitting around their kitchen table working on a budget. We have a tremendous under-utilization of resource within this country. We pay people not to work, rather than putting them to work and investing in the country.
NNAMDIWell, allow me to deal with one issue at a time. Peter Blair Henry, printing money doesn't cause inflation. That's an oversimplification says our caller.
HENRYThe issue is not whether you print money or not. It's a question of how much money do you print. And so I'm not making the argument that the U.S. is currently over-expanding the money supply. That's not the issue. The bigger issue in the United States right now is the lack of clarity, right? On the one hand, we are pursuing quantitative easing, which is an appropriate policy response given the lack of demand the caller refers to, but at the same time, we're in the middle of a sequestration which is contracting demand.
HENRYAnd so we're working across purposes, and there's a lack of clarity due to the ideological divide that an earlier caller referred to. So the example of printing money is just one example of -- if you print too much money, the ways in which governments can be undisciplined, but I'm not making the argument that the United States government is being or the Federal Reserve is being undisciplined in its monetary approach currently.
NNAMDIPaul, thank you very much for your call. We move on to Scott in Salisbury, Md. Scott, you're on the air. Go ahead, please.
SCOTTHi, Kojo. You know, so I just wanted to tell them about the previous -- not the previous caller but the one before. And we are holding up Third World countries is what we should do in the United States. Most of these Third World countries rely on us for their economy and, you know, money from us and foreign aid and tourism and stuff like that, and if you don't -- if we did what they do, it would just bring us down to their level, not us up.
NNAMDIHow would you respond to Scott?
HENRYSo to Scott, the critical thing to understand is that the world economy is not as there is some game. We can all win. And when developing nations prosper, it also adds to our prosperity. As incomes rise in developing world, their demand for our goods and services rise, everything from them wanting to come to the United States on vacation to them importing more automobiles. So there's a win-win that's possible for everybody.
NNAMDIThere's also the notion expressed by Scott that countries like Brazil only can experience the kind of growth that they do basically because they get a great deal of assistance from the United States. How would you respond to that?
HENRYThe prosperity that emerging markets have experienced over the last two decades has not been the result of foreign aid. In fact, there's a larger literature that shows, and maybe we will talk about foreign aid at a later point, that foreign aid has not contributed very much to prosperity. There are reasons for that, and the...
NNAMDILet's talk about it right now. What are the reasons for that?
HENRYWell, foreign aid has never -- quite frankly, U.S. foreign aid has never really been directed at promoting economic growth. By and large, it's been directed at providing favors to governments that we saw as being friendly to other interest that we have. So if money is not directed at a particular target, which in this case is trying to economic growth, it should come as no surprise that it doesn't actually result in economic growth.
NNAMDIScott, thank you very much for your call. We move on now to Nick in Warrenton, Va. Nick, your turn.
NICKGood afternoon, fellows. So, first, I have to say that the idea that money printing doesn't cause inflation, I mean, that's an antiquated concept. It's just absolutely crazy. But that's beside -- the issue I want to talk about -- I edit a website that focuses on crony capitalism and where government and businesses collude essentially to gain the system and essentially hurt the vast majority of the population.
NICKI think we exist in a crony capitalist system now, and that crony capitalism is rife in the developing world also. So I would be interested to know, to what degree do we need to be concerned with the, as you said earlier, appropriate scope of government and business working together?
NNAMDIGlad you mentioned that, Nick, because how would you describe crony capitalism? You seem to be considering anytime government and business work together as crony capitalism. Is that what you mean?
NICKFor the most part, that is usually the case. It's not always the case. But basically, like what we have now, I mean, one of the reasons why the stock market is reaching new heights right now is 'cause $85 billion is being poured from the Federal Reserve into the big banks which then have to put it in just somewhere, you know?
NICKAnd these guys have the biggest bonuses ever, you know?
NNAMDIWell, I'll have Peter Blair Henry respond. And if I can broaden the question a little bit, a lot of people like Nick are skeptical of market-friendly policies instituted by governments, which I guess in some ways is the same thing as governments and business working together. What do you see as the basis of that skepticism?
HENRYI think it really comes down to the issue of trust. So again, there are three key things, right? Third World countries turn themselves around and became emerging markets through the application of discipline, clarity and trust. And if people don't trust the markets, people will trust the rules that underlay and define the rules of the game, then they will participate. And so trust is really key, it's a foundational principle to the proper functioning of markets.
NNAMDIAnd when he talks about -- when Nick talks about crony capitalism, presumably, he also means that not only do you see the collaboration between government and business, but in that collaboration, the benefit that he sees accrues mostly to business. How does that collaboration, in your view, provide growth, and how does that growth help populations as a whole?
HENRYLet me give you a very specific example. Think about the stock market. If the average citizen doesn't trust that if they put their money in the shares of a company that they will be treated fairly like any other shareholder, whether they're big or small, that people will cease to put their savings into equities. Citizens do that, the cost of capital for corporations will go up, they will invest less, hire less workers, employment will go down, wages will not rise.
NNAMDIAnd addition to it, my 401 case gone.
HENRYWe don't want that.
NNAMDINick, thank you very much for your call. Let's go to Sean in Harpers Ferry, W.Va. Sean, you're on the air. Go ahead, please.
SEANThank you, Kojo. My question is this. In the United States -- within the United States, we actually have many different economies which can frequently be broken down on a state-by-state basis, and some of those economies like mine in West Virginia are, in some ways, more like Third World economies. They are much more impoverished and don't develop the way that the rest of the economy does. Are there lessons for states like West Virginia from the Third World countries you were talking about?
NNAMDIGo on ahead.
HENRYYes, I think there are. And if I could, for a moment, just...
HENRY...let's understand exactly, what do we mean by discipline? Discipline means, a long -- a commitment, a sustained commitment to long-term prosperity. And to connect it to a point that Kojo made earlier, that is vigilant and flexible and values what's good for the country or the state, in this case, or what's good for any individual, interest group or politician running for office. And so that -- those general principles apply whether you're talking about a country in Africa or Asia, we're talking about the state in the United States that is in need of renewal.
NNAMDIAnd, you yourself said earlier that it's important to have the citizenry, the people understand that. In Chile, which you referred to earlier, in 2008, thousands of people protested the Minister of Finance Andres Velasco's decision to keep most of the country's wealth in savings. History has now shown that those were prudent economic policies even if they were unpopular. How can good economic policy diverge with what people seem to want, and how do you persuade people that that may be the best thing for them?
HENRYThat is the challenge of leadership. And...
NNAMDIHaving us take castor oil, huh?
HENRYAnd sometimes leaders have to make very hard decisions. When Velasco, as you referred to earlier, made that decision, he was very unpopular. But a-year-and-a-half later, he was one of the most popular ministers in the cabinet. Erskine Sandiford, the prime minister of Barbados, in a story that I referred to earlier, his government was kicked out of power for 14 years as a result of the decisions he made. But when asked would he do it again, he said, the price that I paid was small to save the country.
NNAMDIGot to take a short break. Sean, thank you very much for your call. If you have called, stay on the line. We'll try to get to your call. The number is 800-433-8850. We're talking with Peter Blair Henry. His book is called "Turnaround: Third World Lessons for First World Growth." You can also send us a tweet, @kojoshow, or email to firstname.lastname@example.org. I'm Kojo Nnamdi.
NNAMDIWelcome back to our conversation with Peter Blair Henry. He is dean of New York University's Leonard N. Stern School of Business. He's author of the book "Turnaround: Third World Lessons for First World Growth." We're taking your questions at 800-433-8850. When a country's economy is struggling, we often expect crime to follow.
NNAMDIVenezuela, Jamaica would both be examples. But if you look at Mexico, the government there turned its economy around, but can't seem to manage to overcome the rampant organized crime. How far can economic prosperity go in solving a country's social problems?
HENRYWell, prosperity certainly can be an aid to addressing any given societal problem, but prosperity alone, resources alone, as we know, don't solve problems. So resources are needed, but also, of course, courageous leadership and good thinking about actually how to solve those problems.
NNAMDIMany people in the Caribbean feel that free trade and open markets have not brought about prosperity. When the World Trade Organization dismantled the Caribbean's preferential trade agreement with Europe, the agriculture industry there suffered a crisis, you know, in Jamaica and Dominique. It was bananas. Do you think that this speaks to the negative side effects of breaking down trade barriers and embracing the market?
HENRYWell, the key thing to this one is understanding what's good for a nation as a whole over what's good for any set of individuals. And I think what people sometimes forget -- for instance, when you think about removing trade restrictions and bringing goods into the Caribbean, for instance -- is that take, for example, the low-cost milk coming from abroad. It hurts milk farmers in the Caribbean, but many, many more citizens are able to get milk more cheaply, benefit from that.
HENRYSo we have to think about both sides, both consumers and producers. And talking earlier about the caller's question about the government and businesses working together, what we often see in countries is that businesses do hijack the political process and achieve what's good for them -- a few business owners -- but it's not good for the country as a whole.
NNAMDIHere is Rick in Laurel, Md. Rick, you're on the air. Go ahead, please.
RICKOh, hi. Thank you. You know, I don't hear this discussed, but I think there must be some truth to the fact that no matter what economic policy a country follows, there's always going to be a fairly large segment of the poor that stays poor simply because they can't defend themselves against aggressive or even predatory market conditions. And I even see this among fairly well-educated people who are -- even among the elderly.
RICKThey'll buy the extended warranty on a fridge, or they think they're getting a good deal on a car because the payments are lower even though it's a seven-year loan, that sort of thing. And I just think the poor are constantly set upon by market conditions that take advantage of them either because they can't avail themselves of a good deal or they don't understand compound interest, you know, payback time, simple principles of economics like that.
NNAMDIWell, do you think the poor are poor because of predatory practices of businesses in general or because economies of scale have not expanded to reach the poor?
HENRYI think there are two separate issues here. Clearly, we need to educate and protect the poor, but we also need to create opportunity for the poor to raise their incomes.
NNAMDIIf we look at the case of Miss Mama that you referred to in the book, even if she were living in Barbados as the economy was expanding, as the middle class was growing, and implicit in the analysis in "Turnaround" is that as that middle class grows and it spends more money, it will create jobs that will employ more of the poor ultimately. Nevertheless, one gets the impression that in the final analysis, the elimination of poverty completely might still be a pipe dream?
HENRYPipe dream is a strong word. But I think the really critical thing here is that as we shoot for an aspiration, even if we never get to that ultimate goal, we're improved in the process. And so you're right to some extent. I mean, biblically, we're told the poor will always be with us, that sort of philosophical statement about we always need to improve.
HENRYSo no matter what state in which we find ourselves, we can always do better. And so I'm not saying that economic policy alone will solve all the world's problems, but good economic policies, policies that create prosperity will make it a lot easier to deal with any residual Miss Mamas in the world.
NNAMDIThank you very much for your call. How could the kind of economic reforms Brazil adopted have prevented so-called First World economies from spiraling into the debt crisis?
HENRYWell, again, if we would have been prudent when times were good in the early 2000s, we would have had a much bigger cushion to deal with the economic crisis that we've suffered in the last few years.
NNAMDIIf we did not indulge in the kind of borrowing, lending and borrowing that we did when times were good?
HENRYLending and borrowing in particular on the public sector's part.
NNAMDIAll right. On to Jalvis (sp?) in Washington, D.C. Hi, Jalvis.
JALVISHow're you doing, Kojo?
JALVISYes. My question is this. I mean, I was approached 15 years ago by a company that was -- an Asian company that was worth about $11 billion. They wanted to partner with me on a deal that would allow them to do 80 percent of the activities for our company -- for their company, and we would do 20 percent. This is about 15 years ago. So I refused the deal because I felt like it would create stagnation in our country. So we blew that deal.
JALVISSo my question here is -- stagnation is what we're involved in right now because back then they were talking outsourcing. Now, they're talking insourcing, something I was talking about 15 years ago because I saw what was happening. You know, they literally took over basically all of the economic activities in this country. There's nothing in this country that we produce now other than bubblegum and baseballs.
NNAMDIHow about high tech?
JALVISWell, high tech, we're being robbed by them, too, because everything that we have over here has been duplicated over there. What are we really producing over here?
NNAMDIPeter Blair Henry?
HENRYI think it's important to realize that economies are dynamic. Fifty, 60 years ago, the U.S. economy was highly agricultural. So at the turn of the century, 80 percent of the workforce, if not even a little bit higher, was involved in agriculture. We moved into a manufacturing economy. And now we're a service economy. So the question is how do we prepare ourselves for the jobs of the future as opposed to how do we hold on to the past?
NNAMDIThank you very much for your call. We got a tweet from Jerry, who says, "Being from Barbados, I appreciate the mention of the positive long-term results derived from tough decisions." Well, Peter Blair Henry, In Greece, reforms have triggered violent protests. Does disciplined economic reform just mean taking the most painful route?
HENRYNo. So discipline, I think really importantly, does not mean binge eating on the one hand, but it also doesn't mean crash dieting. And I think right now in Europe, there's an insistence, if you will, and this is largely frankly a result of Germany's view on crash dieting. And we need more reform and less austerity. And I think Barbados is a very good model for your -- what I mean by that -- how -- so people say how can possibly such a small country as Barbados be a model for Europe? Well, the issues are very similar.
HENRYEuropean countries like Spain, Greece, Italy had become uncompetitive because wages have not kept up with -- productivity has not kept up with wages. And if a country like Barbados -- and in a small country, when you make tough decisions, you're not cutting the wages of some anonymous person, you're cutting the wages of your brother or your cousin, somebody you know. So it's very hard to make those tough decisions in a small society. If they could find the courage and the wisdom to reach a compromise, then surely Europe can do better than it's currently doing.
NNAMDIRepublican and Democratic lawmakers unveil their respective budgets this week, and to no one's surprise, they've got different visions for solving the nation's debt problems. With this kind of political gridlock, what hope is there for long-term economic reform here in the U.S., the passage of that one piece of legislation that you're talking about?
HENRYI think the key is focusing on long-term prosperity and asking the question what is going to generate economic growth as opposed to focusing on specific, let's call them head items because there has to be compromise on both sides.
NNAMDIWhat kinds of economic reforms do you think could help solve the U.S.' problems?
HENRYWell, first and foremost, I think, again, resolving the uncertainty about future fiscal policy because I think if we resolve the uncertainty about future fiscal policy we will see more investment. When we get more investment, growth will pick -- so right now, we're growing at about 2 percent per year. To help our listeners understand, in order for the U.S. just to maintain constant unemployment level and reduce unemployment, the U.S. has to grow by about 2.7 percent per year.
HENRYSo you need growth of 3 percent or more to really make a sustained dent in the unemployment numbers. And so you got to get growth. And the way you get growth is if firms start to invest again and not just sit on the cash their currently sitting on that's been part of the stock market, begin re-investing in the economy, hiring workers, putting people back to work and generating tax receipts and...
NNAMDIAnd what would lead to that level of investment confidence on the part of the investors in markets that the economy is approaching, this -- that our leaders are approaching this in a disciplined manner?
HENRYThat leaders are approaching this in a disciplined manner and, frankly, just clarity about what taxes are going to be and what our policy is.
NNAMDISheila in Eglon, W.Va. You're on the air, Sheila. Go ahead, please.
SHEILAWell, this is a first, Kojo. You had two West Virginians on your show in one hour. You should be congratulated.
NNAMDISounds like an invasion from West Virginia. Go ahead, please, Sheila.
SHEILA(unintelligible) I guess I'd like to have the author, Mr. Henry, speak a little bit about those people in our society who we consider unproductive, those who are marginalized because they're poor and because of things like they've been convicted of crime. And I'd like to bring up an important point. The people of -- in prison, people are able to work in prison industries to make corporations billions upon trillions of dollars. Actually, the amount is really not known.
SHEILAI am a statistician. I know this for a fact. This is something I work on. They're able to make things like the Patriot missile and have security clearances to do this. Yet when they come out, if you're in the District of Columbia, which is my hometown, you're not able to get a job driving a bus or working in a doughnut shop.
SHEILAAnd so my theory is that there are obviously economic reasons why -- political and policy-oriented reasons -- although I don't know what they are -- why we would want to keep certain segments out of the economy if we were to enfranchise those segments. The -- imagine the tax revenue and imagine the incredible boost to entrepreneurship in our economy that could happen if we just reached in and try to re-enfranchise those who are marginalized by our own hands.
NNAMDIPeter Blair Henry, she makes a juxtaposition of the amount we spend on defense and the amount that we do not spend on creating jobs for the poor. How would you respond?
HENRYWell, there's no question that any segment of society that is marginalized, it's not just -- dealing with that issue is not just a matter of good will. It's a matter of good policy because it's costly. And I would back up and say, you know, before even thinking about how to deal with the problem of (word?) to people in society, let's start at the very beginning. And let's have a serious conversation about how we make sure that we're educating our youth to be productive citizens.
NNAMDIPresident Obama and Democrats make the argument that, OK, we've got to cut budgets. On the one hand, we do have to do some belt-tightening. One the other hand, if we're going to create jobs and grow the economy, we need revenues on the other hand. And if we do have those revenues, then we can put it in things like infrastructure and creating jobs. Is that the kind of thing Barbados did?
HENRYBarbados made big investments -- has always made big investments in education. Barbados has one of the highest literacy rates in the world. And...
NNAMDII got to tell you a story about that. Once, I was lost in Barbados, and I was looking for a street that had a fairly long name to it. And I just stopped a guy who looked homeless walking down the street and I gave him the name of the street. And I guess he couldn't understand my pronunciation so I spelled it. It had about 12 letters in it. He immediately knew which street I was talking about. Everybody in Barbados can read and write.
HENRYExactly. I'm surprised he didn't start quoting a Latin passage to you.
HENRYAnd that's exactly the point. And for small countries, this is particularly important. So there's a caller earlier who asked about the evolution of economies, right? We're now in a service-driven world. You need an educated population that can do many different kinds of tasks.
NNAMDIThank you very much for your call. We got a tweet from Ari, who says, "Four years in Kenya made me a believer in the power of job creation also known as sustainable capitalism." Is that what we are talking about here, sustainable capitalism?
HENRYAbsolutely. Sustainability is the heart of capitalism.
NNAMDIPeter Blair Henry is Dean of New York University's Leonard N. School of Business and the author of the book "Turnaround: Third World Lessons for First World Growth." He was born in Jamaica, the third world, but educated by first world institutions. Peter Blair Henry, thank you so much for joining us. Good luck to you.
NNAMDIAnd thank you all for listening. I'm Kojo Nnamdi.
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