Tyler and Jeffrey Sachs discuss the resource curse, why Russia failed and Poland succeeded, charter cities, Sach’s China optimism, JFK, Paul Rosenstein-Rodan, whether Africa will be able to overcome the middle income trap, Paul Krugman, Sach’s favorite novel, premature deindustrialization, and how to reform graduate economics education.
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Recorded April 7th, 2015
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TYLER COWEN: I introduce Jeff Sachs; that’s easy. Jeff is one of the world’s best, most famous, and most influential economists. There’s more I could say, but let’s start with that.
The purpose of these series is to have conversations that you don’t find other places on YouTube, and to ask probing questions and have a far-ranging dialogue. What I’d like to do is kind of overview of Jeff’s career and thought and try and see how it all hangs together, how the different pieces relate to each other. What I’d like to do is start with some of the early pieces, from the ’80s and 1990s. Then we’ll work our way up to the present.
The first question, Jeff, and we’ll treat this as a dialogue. Some of your best-cited work has been on the natural resource curse: the idea that economies, when they have natural resources — such as oil — that can harm their prospects for growth rather than helping them. Now we’re in 2015. How do you see this issue today? Do you think that has changed in any way since the first thesis you wrote?
JEFFREY SACHS: First, let me say thank you for having me. I’m really looking forward to our discussion.
About 25 years ago, I started looking more and more at my own work and how economic structure, geography, resource base, and so forth affected development. I’ve been on a learning curve since then. One of the early works that I engaged in at that point with Andrew Warner and others was looking at this question of how resource wealth, resource dependence one could say, affected development.
We found back in the 1990s, looking for the preceding 25 years or so, that the oil-rich countries had grown less rapidly, controlling for seemingly other factors that would be relevant. We started to speculate about that. There’s now a huge literature from many different points of view: politics, pure economics, and so forth. It’s a pretty rich subject and not so simple to summarize. There really is a resource curse for a lot of resource-rich countries.
At this point, looking back, I would put more weight on the political economy aspects probably than the pure, market-driven “Dutch disease” aspects which I talked about a quarter century ago. The idea at the time was that if you have resource wealth that pulls you away from more labor-intensive and technology-intensive industries. You don’t learn as much. You don’t develop as much endogenous growth.
Now I would say if you have resource wealth, one problem is you’re likely to be invaded. You have more vulnerability to geopolitics as well as to internal politics to mess things up.
COWEN: Is this a habit you can kick or is it path dependence? The price of oil now is quite low. Do you think those countries that have a lot of oil, now they’re going to be better off because they’ll be put on this new development path, or is it somehow too late, that they’re stuck with the bad institutions?
SACHS: First, one of the things that I’ve tried to emphasize and that I’ve learned over time is it’s always pretty complicated. There are resource-rich countries that do very well, thank you. There are resource-rich countries that have fallen apart a long time ago and never gotten out of the mess. Any generalization is fraught with problems.
Norway will do well, whether the oil price is high or low. On the other hand, last time the world oil price was persistently low, the Soviet Union collapsed. Russia was near hyperinflation. Different countries under different conditions will adjust to these shocks. Resource-rich Norway, Australia, Canada — I wouldn’t worry too much about them.
Their currencies will weaken. They will find other things to do, whereas some of the very vulnerable countries that have never been able to kick the habit of dependence, like Venezuela, will probably go into a deeper crisis. The Middle East has been in flames now for years. I don’t see any easy way out there, either.
COWEN: Here’s the tension I’m trying to figure out. It relates to a number of issues in your thought. You’ve written some very interesting pieces lately about how the role of institutions is overrated in predicting growth, but institutions seem to play a key role in making the resource theory stick. As you say, Norway has done fine. The US in earlier times did fine with a lot of natural resources.
Does thinking about resources lead you back to seeing institutions as important in some new and different way or are you still basically skeptical about institutions mattering at all and wanting to look most of all to geography? Do you see what I’m getting at?
SACHS: Of course, but again, I’ll say it repeatedly, I’ve never said institutions don’t matter. I’ve said institutions aren’t the only thing. I find often that people take an idea and carry it to an extreme.
This “institution matters” idea is one of those that I’ve found taken to extremes by causing a kind of geographic blindness, if I could say it. Geography obviously matters a lot. Resource base matters a lot. Institutions matter a lot. The world’s complex. We’re dealing with complex systems.
It’s not surprising that different things matter at different times and different places. Of course, institutions make a difference. The art of good economics, in my view, is trying to figure out what’s important, where, when, and in which context.
COWEN: Here’s a claim you’ve made. It’s very striking. It’s one of the most important claims in development economics. Personally, I think it’s true.
When you reviewed Acemoglu and Robinson, you said, “If we go to the year 1960, even knowing who the winners and losers have been, much less forget about forecasting, it’s very hard to come up with a metric of institutions that predicts which countries end up doing well and which countries end up doing poorly.”
When I read that, I tend to think somehow we’re mismeasuring institutional quality. We really need a better measure of institutions, which we don’t have yet. Institutions will someday matter again, but I’m looking for this in vain.
Where does your thought stand on this now? Do you actually think there’s some deeper understanding of institutions that will rescue this proposition? When you throw out North Korea and some other crazy countries, institutions don’t really have the predictive power for growth.
What are your thoughts on this, given that in the across-country regressions, they can do so poorly within the set of semireasonable countries?
SACHS: Acemoglu and Robinson’s book Why Nations Fail was one of my least favorite books. I think it is just a bad book, because it takes one thought and tries to drive it as the only explanation of history. That’s not a good approach in my view to history, which is a very interesting, complex tableau.
They missed one fundamental point right from the start, which is that when you look at development, there are at least two fundamental drivers, not just one. The one that they talk about is innovation, and innovation as being a fundamental driver of growth. There’s a lot of truth to that in the history of the world.
But there’s a second fundamental aspect when we look out in the world and say, “Who’s doing well? Who’s doing badly? Why?” and so forth. That’s what is sometimes called “catching up.” The phenomenon of catching up is very different from the phenomenon of forging ahead at the front of the technology horizon.
When you take that simple distinction, it helps to explain a lot of the post-1960 question that you’re asking. The most successful countries in the world in the last 50 years have been basically the East Asian economies and Southeast Asian economies.
Very rarely do they look like the textbook model of Acemoglu and Robinson of the free market economy and so forth. In fact, the People’s Republic of China they characterize as just — that’s an anomaly that is going to collapse in the future so we don’t have to explain it now.
I think that’s a huge mistake and a misunderstanding of the basics. China’s in a catching-up mode. The institutions of catching up are quite different from the institutions of being the technology leader, for example. Just understanding that would give them a little more clarity about institutions, per se.
COWEN: And corruption, over- or underrated as a driver of growth?
SACHS: It depends. Some places are so corrupt you first wouldn’t want to step foot in them and I’ve had the experience repeatedly when I’m talking to a head of state or a finance minister and I watch their eyes glaze over and realize they’re not interested in what you’re talking about. They’re in a different game. Those places can be driven absolutely into the ground by corruption.
Other places have been corrupt for a long time — I’m thinking of New York, Washington, Lagos, Beijing, and other places — and you get a lot of economic progress. In that sense, there is no purity in the world. I’m not a fan of corruption for a lot of reasons that have started with the ethics.
COWEN: China’s massively corrupt and it’s growing at high rates, right?
SACHS: China has a lot of corruption. The first person to say it is President Xi. The US has a huge amount of corruption and it has done reasonably well over the last 200 years.
COWEN: Let me now ask you a question to challenge the audience, and we’re going to turn to Paul Rosenstein-Rodan, who’s somewhat of a forgotten figure. But I think still an important figure at George Mason, and maybe for you too.
As you know, Rosenstein-Rodan was a development economist. He was one of the pioneers of the notion of the big push of an extended move forward on many fronts, all at the same time. But when you look at the early years of his thought, he studied with Mises. He worked with Hayek. He was an Austrian. He was a subjectivist, methodological individualist, and he made some kind of theoretical shift in his mind.
What is it that you think that Paul Rosenstein-Rodan saw, and presumably you think you see it as well, that the people today who are still Austrians at the theoretical level, what is it that Rosenstein-Rodan saw that allowed him to make that shift or induced him to make that shift at the most basic conceptual level?
SACHS: He was writing during and at the end of World War II, when he was saying, “How are we going to get out of this mess? There are so many pieces that have to be put together. We have to get infrastructure built again. We have to get basic markets operating. There are a lot of interconnected pieces, and so we’re going to have to move on a lot of fronts.” He was facing a historical situation.
I would say that his idea — I’d go back even . . . actually, it’s not back. It was almost contemporaneous with him. Alexander Gerschenkron, who was a very clever economic historian at Harvard. I came as a student just as he was retiring. He was a great mid-century, mid-20th century economic historian.
He observed that what countries do for development depends on how they stand in relation to the leader, and this is a point I was making earlier, which is that catching up is a fundamental phenomenon in development.
There’s a difference of growth, which we study as an economy, how does it grow? From the question of catching up, which is a question for a country that is situated with weak technology, weak infrastructure, weak training, and so forth. In the face of advanced economies, what should they do?
Now that’s been a question that’s been asked for at least 224 years, since Alexander Hamilton sent his letter to the congress on manufacturing in the United States. Because he said we have to catch up with Britain. Then Friedrich List said, “We have to catch up with Britain.” Economic reformers from basically Hamilton on in countries that were lagging behind the lead said, “What do we do to catch up?”
Now you can carry this too far because the insane version of this, and the unbelievably destructive version of this, was Lenin and Stalin. We have to do anything at no matter what cost of life to catch up, or Mao in the Great Leap Forward, which is insanity and cruelty.
But, on the other hand, the idea that you do different things to catch up by accelerating the process or by making the big push in a variety of ways has been shown time and again to have a lot of merit. It’s a balance, once more. The first countries to develop, Britain and the United States . . . Take the US. We’ve achieved almost continuous 1.8 percent per year per capita growth for the last 200 years. Not bad, if you do it for 200 years.
But if you’re an impoverished country today and you say, “What’s our aim? 1.8 percent growth?” No, our aim is 10 percent growth, because we really need to catch up. It turned out, because of that catching-up phenomenon, you can make a very, very rapid advance in a way unthinkable for a country in front. But how do you make that advance? Through pure government just stepping back and letting things happen? No. Through a concerted policy to close gaps. That’s the difference.
COWEN: I’ve been reviewing your work, including these books, and a stack of papers here, which is a small fraction of what you’ve written. I believe they all have your name on them. What I try to do with thinkers sometimes is boil down what they’ve been writing to the smallest number of dimensions possible.
If you’ll bear with me for a moment, I’m going to try to do that with you, and then you tell me where I’m off, or what you would add to that. Reviewing all the things you’ve written . . .
SACHS: You probably know more about me than I do, so let’s see how it goes.
COWEN: Maybe. But there are two phrases that strike me again and again. One is when you mention your wife, Sonia, and talk about differential diagnostics. The other is what you call the epoch of the Anthropocene, which you could think of as the time when human beings are in the world in an active way.
When we start with primitive society, everything is determined by geography and resources. Economic development, in a sense, is an ongoing process where human beings impose their will and their reason on the world in a kind of planning or voluntaristic fashion.
Then there’s a belief that first this needs to be done in a differential way. Not the same recipe everywhere. But a belief in the power of human reason to perform these differential diagnostics to turn this era when humans are on the earth into a time when we’re no longer ruled by resources and geography and the prevalence of malaria. But brought into an era where human reason is in some sense running the show.
If I had to boil down my reread of you into a very short bulletin, that’s what I would say. Now do you agree with that, how would you change it, and what would you add to that?
SACHS: That’s pretty good, first of all. I would subscribe to that summary. I should explain this idea of clinical economics, as I’ve called it, or differential diagnosis. When you’re married to a pediatrician, as I have been for 35 wonderful years, you get up in the middle of the night a lot when patients call with a very sick child.
I’ve listened to my wife take an oral history a thousand — thousands of times, perhaps. It’s a wonderful art, first of all, because a mother calls with a crisis of a baby or a young child — usually a high fever. The first thing that is important to know is that there are a thousand possible etiologies of that fever. My wife doesn’t say institutions. She says . . .
SACHS: . . . “It depends. Let’s hear your problem. Oh, you’re in a desert, you’re here, you’re this . . .” No, when it comes to the child, it could be something as normal as a common cold or a something as devastating as meningitis.
The purpose of a differential diagnosis is two things. First, it is of course to try to get to the core reasons so that you can make a proper prescription based on a proper diagnosis. Second, it’s done in a way that you’re minimizing serious risk.
The first question always that my wife asks is, “Is the baby’s neck stiff, or do you notice that?” Because that’s one of the symptoms of meningitis. If the mother answers that way, the next point is “I’ll meet you at the emergency room. Don’t stop. Just go.” Because it could be something that is fulminant and life-threatening immediately.
If it’s not that, then it can go on for an hour.
But by the way, it’s not just an hour of questions. It’s an hour of sequenced questions down a decision tree, and it’s fascinating to watch. I wish as economists we had those basic skills inbred. I certainly didn’t learn them, and it took me a long time of seeing lots of “patients” to see that one needs that same kind of approach.
That’s what I mean by differential diagnosis. Why it’s so annoying to me, the one explanation fits all viewpoints. Because now I’ve seen a lot of places, a lot of crises, a lot of challenges. One of the things that I discovered was how poor our profession is at times in having that sense that the problem that you saw over there is not the same as the problem that you’re seeing here.
COWEN: Let me push on this a bit and see if you can convert me into being more of a Sachsian. One of my worries is that the doctors are not actually in charge. It may be the lawyers, which is . . . We’re in a law school, but still, if I may say, in some ways a step down.
To some extent you have people voting on the baby, not all of whom even know who the baby is or what the baby’s symptoms are. The differential diagnostics may exist in a kind of platonic realm, but you are more optimistic about them than I am.
What would you tell me to address my skepticism and make me more of a Sachsian, given that I have this reluctance to embrace your view the way you hold it?
SACHS: I think I get what you’re driving at and I do have a fundamental view of at least how I want to proceed professionally. But it’s also based a bit on a theory of change.
COWEN: Tell us the theory.
SACHS: I believe that knowledge matters and that the more clarity, the more evidence, the more appropriate an analysis, the more likely we can find a good outcome to things. Many people are cynical. I tend not to be. I’m sometimes accused of being gullible as a result, or being too soft in the face of whatever. But I believe that there’s a way to reach an agreement, typically, among pretty conflictual and often pretty antagonistic actors.