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Australian Broadcasting Corporation Transcripts
August 16, 2011
By Eleanor Hall
(c) 2011 Australian Broadcasting Corporation

ELEANOR HALL: The Nobel prize winning economist, Michael Spence, has written a new book which makes what many in the West would regard as some alarming predictions.

Dr Spence's book "The next Convergence" details how after centuries of divergence between the developed and developing worlds, developing countries are now the engines of global growth and he predicts that by the middle of this century a massive power transformation will have taken place.

He says that the US and Europe will no longer be the biggest or most important players on the global economic stage - instead, India and China will have assumed those roles. So what does this shift mean, is it inevitable, and should we be concerned?

Dr Spence is a Professor of Economics at New York University's Stern School of Business. He joined me this morning from Melbourne.

Michael Spence, many people in the West would be alarmed by your book's prediction that by the middle if this century the positions of China and Japan on the one hand and Europe and the US on the other, will be reversed. What do you mean by that, what will that reversal look like?

MICHAEL SPENCE: Well they'll be wealthier and more like us in terms of lifestyle but because of the populations, they'll be very big economies. So the reversal is the reversal of relative size. The most common question that I always asked when I started out talking about the book was if they win do we lose?

And it seems to me the answer to that is fairly clearly not, you know. Countries like Australia and Canada, the United States, if we're on our game, we're gonna, you know, be highly competitive, we'll be playing in an enormous global economy but there's no reason to think that we won't do just fine.

ELEANOR HALL: If there is this reversal economically, that would inevitably one would think force significant political and cultural changes. How different do you think the world will be in those terms by the middle of this century?

MICHAEL SPENCE: Well it's a very good question Eleanor. You know, I think it's very hard to predict. I mean the hope is that we'll have a reasonably collaborative global governance system with these new players in the game. We're already starting on that course with the G20.

The downside risk is that these new entities will be less altruistic, more self centred than has been characteristic of governance in the post-War period. But I think on balance that's probably not the most likely outcome.

I think the one thing in America that we'll have to get used to is not being as dominant as we have been in most of the post-War period.

ELEANOR HALL: Well this convergence as you call it was already underway but to what extent did the global financial crisis of 2008 deal essentially a death blow to the ascendancy of the US and of Europe?

MICHAEL SPENCE: It certainly created enormous problems. I mean I think over time we'll go back to like a fairly normal pattern of high growth in the emerging economies and reasonable growth in the advanced economies.

Probably the crisis accelerated this a little bit, because we're gonna grow more slowly, so the convergence will occur a little more quickly.

ELEANOR HALL: Do you agree with the World Bank's Robert Zoellick that we are in for decades of instability in the major developed economies?

MICHAEL SPENCE: I'm not sure I'd go as far as decades - I think we're in for a pretty tough decade and then if we don't act decisively and aggressively it could extend beyond that.

ELEANOR HALL: How worried are you by the European debt problems? is it possible that they could end up killing off the euro and European Monetary Union?

MICHAEL SPENCE: Yeah, there's a real risk of that. I mean you know, right now they're playing fireman, putting out fires and buying a little more time but there hasn't yet been a decisive intervention that's really likely to stabilise the countries that are potentially or are actually in trouble, and the euro.

ELEANOR HALL: So you say they're putting off dealing with the fundamental problem - what should they be doing?

MICHAEL SPENCE: Well the hard problem that they have to decide is that a lot of countries with citizens that have very different attitudes about this; they have to decide the burden sharing.

ELEANOR HALL: So what are the dangers there as that process continues?

MICHAEL SPENCE: That it'll lock up and we'll just have more and more and more and more serious bouts of contagion but I think they'll try very hard to keep this together and keep the forward momentum of European integration going.

ELEANOR HALL: And if that doesn't happen, what then happens to Europe in terms of its position in the global economy?

MICHAEL SPENCE: Well then Europe becomes a bunch of medium, you know important but medium to small countries that has much less influence in the global economy and that's not good for Europe but it's definitely not good for the rest of us.

I think a world that we're entering that has mainly just the United States and China as the main powerful entities for a while is a less attractive world than one in which we have a powerful and strong Europe.

ELEANOR HALL: If as you predict there is this reversal in the roles of Europe and the US with China and India, how will that affect the way that global economy works, especially if China remains under Communist rule?

MICHAEL SPENCE: Well that's a very good question, I mean - you know, I don't think that it's impossible to imagine a world in which the main players who are responsible for managing the stability of the whole system have rather different political systems but we're in unchartered territory when we get into this, Eleanor.

China and Asia along with it, including India, are capable of tripling the global GDP in the next 25 years and if we're starting to feel pressure on natural resources now, I think they're starting to realise they're going to have to reinvent to some extent the growth model.

ELEANOR HALL: As you look at the convergence of the developed and the developing worlds, you're clearly and optimist. But what is the downside scenario?

MICHAEL SPENCE: One downside scenario is that we don't change the growth patterns and run into natural resource constraints which produce something that more resembles a zero sum game and even the potential for conflict.

The second I think is that we've got many players in the game with legitimate but multiple diverse interests and China is by far the poorest country ever to reach the status of being systemically globally important.

And so I think there's the potential for insufficient collaboration and coordination of policy and therefore very volatile. So I think there's headwinds that we'll face and there's some risk there but I think they'll become partners rather than enemies.

ELEANOR HALL: Michael Spence, thanks very much for joining us.

MICHAEL SPENCE: Thankyou Eleanor.

ELEANOR HALL: Dr Spence is a Nobel prize winning economist and Professor of Economics at New York University's Stern School of Business. He was talking to me about his new book "The Next Convergence" and you can listen to a longer version of that interview on our website.