Interview with Paul Romer: The Challenge of Growth

ETHOS Issue 03, Apr 2008

When people think about the development process, they sometimes look for a silver bullet, or the one policy or model that will drive growth. I think that is too naive. The growth process is very complicated. There are no silver bullets, no single model that everyone can copy. Singapore is a distinctive case of successful development under unusual conditions, so we should think of Singapore not as a model but as a very interesting data point.

I think the Singapore Government has done the right thing by conceptualising development around the idea of a city rather than a nation. Singapore’s development as a financial centre à la New York or London is well underway; perhaps Hong Kong is a little bit ahead but there is good reason to think Singapore will keep moving up as a financial centre. You also have a clear vision of how to grow as an entertainment and tourist destination.

There is a little bit more uncertainty about Singapore as a “Silicon Valley”—as a centre of entrepreneurship. Entrepreneurship is something that many people learn first-hand, when there is an environment with plenty of entrepreneurial or start-up types of experience. People who live in that environment often go on to start other companies, and if there is the finance and legal infrastructure to support that, one little seed can grow into a whole culture of entrepreneurship. The question in Singapore is how to create that environment.

Singapore’s public sector has had a central role in directing development in the past. As the economy matures, should state involvement be scaled back in order to allow an entrepreneurial sector to flourish?

This is one of the oldest questions in economics: What is the role of the state and what is the role of the market? We tend to think of the government and the market as substitutes. But if you limit government to those activities where it is uniquely important, then in those key areas, what the government does is a complement to what the market or the private sector does. If the government does its job better, it enhances all the activities of the market. This is where thinking of Singapore as a city rather than a nation helps: you realise that there are many interesting ways in which the government can create value, such as through measures like land use planning.

When you think about the problem this way, the challenge is for the government to keep its focus on those complementary activities where its role is critically important. The problem in having, for example, a government-run phone or airline company is not so much that you suppress entrepreneurship in telecoms or aviation, but that it distracts the government’s resources from areas like education, research, and technological development where its role is uniquely important.

What positive roles can a government play in spurring innovation and enterprise, without detracting from its core competencies and mission?

If you look around the world, government is often influential in promoting new technologies, but exactly how it should do this is a subtle question. In some cases, governments have been important consumers for high-tech goods. For example, in the early development of the transistor, the US Department of Defense wanted extremely high-reliability transistors for missiles and satellites, whereas Sony wanted transistors for cheap, portable radios. So digital consumer electronics developed more rapidly in Japan than in the US.

In the 1970s, when Japanese firms were dominating consumer electronics, this looked like a mistake in US policy. Yet the Department of Defense probably helped speed up the development of integrated circuits and helped establish the US lead in digital information processing.

The general lesson one can learn from this episode is that it can be very difficult to predict how government interventions will affect the economy. However, if a government ministry tries to develop knowledge or technologies that will help it do its job better, it can result in more effective government—and sometimes in technologies like integrated circuits that benefit the broader economy.

I think the lesson for Singapore is that it could consider more mission-oriented funding for basic research across a whole range of agencies. These agencies could fund research in universities to help them achieve their own missions. This might also help with entrepreneurship. For example, I have spoken with the Ministry of Education and I think there is some very important mission-oriented basic research that they could do that could have both a direct application to Singapore’s educational system, and that could also result in valuable commercial spin-offs.

Universities are very important as both the performers of research and as the trainers of people who will go out and create value in the rest of the economy. On the training side, you now face two distinct challenges. You need a mixture here both of institutions where lots of students can get in (which helps raise human capital for the whole economy), but also of some other institutions that are amongst the most selective in the world, that some of the very best students in the world will want to apply to. In some ways, you might think of the Indian Institutes of Technology (IITs), as an example outside the United States.

In your view, what are the key challenges facing governments in creating the conditions for economic and technological progress?

One of the lessons that is coming out of the academic work I have been doing on the Growth Commission¹ is that good management and good leadership is very important for governments, just as it is for companies.

A lot of countries have viewed government employment as kind of a social policy or a form of patronage. They think that you give government jobs to people who are poor to help them have a better quality of life, or you give government jobs to people in your party to help build your political base. Both of these approaches can result in a bureaucracy where people are not well-matched to the government jobs that they are doing, or in too many people employed by the government, with average salaries that are too low. Singapore is distinctive in trying to attract very talented people, and in keeping the number of people in government relatively small and paying those people well. This way you can attract people from the private sector. This is a simple insight, but few governments have been this thoughtful or consistent about this as Singapore has.

The other challenge in good governance lies in dealing with two fundamental problems. The first problem has to do with time horizons. Many political systems create pressure to respond immediately, or the political process deters the adoption of policies which will cause some pain now but gain in the future. So “now-versus-later” is a huge problem in managing politics in governments. We have created some special institutions like independent central banks to address precisely this problem.

Because Singapore’s political system has a dominant party that can form a strong majority government that expects to be in power in the future, Singapore has done a good job in managing “now-versus-later” issues. Because the party expects to be in power for a long time, it takes a long view in addressing problems. Because it has a strong majority, it can take actions that cause some pain now without being thrown out of office. Your political equilibrium would be difficult to replicate in most other countries, but some countries like Italy would probably be well advised to move in your direction, toward a political system where they are more likely to have strong majority governments.

The second problem that governments face is “winners and losers.” Almost any policy you can imagine that would benefit large numbers of people will typically cause some losses for other people. Most effective governments have to decide that there are times when the gains for most people are so large that they are willing to accept some losses for others along the way. This is generally acceptable if you think that those who lose on today’s policy might be very different from those who lose tomorrow. In the long run, it will tend to average out, but you need a government that is strong enough to go ahead with the policy even if there are a few very vocal people who do not want it.

Can growth be sustained indefinitely, assuming shrewd governance? What are the prospects for growth in Singapore and the region in the long term?

One problem that Singapore will face—as will China and India—is that the richer you get, the more your growth rates will slow down. It is inevitable that once you get to the leading edge of income per capita, you lose the benefits of fast growth from catching up. Many governments have trouble adapting when the economy shifts from very high growth to slower growth.

One of the hopeful signs about Asian development generally is that there is a fairly broad consensus now about the gains from trade—a consensus that trade is good for all participants. Increasingly, people recognise that it is not just trade with the United States but trade amongst themselves that can be beneficial. This is a wonderful development because there are enormous gains from trade at the level of the growing countries in this region. One of the unintended consequences of a recession in the United States and a slowdown in imports from the United States is that governments and entrepreneurs worldwide start asking where else in the world they can sell to besides the United States. This will further encourage the development of more trade between the developing countries and the world, rather than just with the rich nations today.

One of the most important lessons from history is that growth continues and even speeds up when more people are innovating and trading with each other. Steadily expanding trade will help this region and the world increase the rate of discovery. With good policy that supports increased economic integration, growth at the rate that the US achieved in the 20th century, or perhaps even growth at somewhat faster rates, can be sustained into the foreseeable future.

NOTES

1. Launched in April 2006, the Commission on Growth and Development (www.growthcommission.org) brings together 21 leading practitioners from the government, business, and policymaking arenas, including Singapore’s Senior Minister Goh Chok Tong. The Commission is chaired by Nobel Laureate Professor Emeritus Michael Spence.