Defying gravity: Uphill flow (or re-flow) of ideas and lessons? Arvind Subramanian Peterson Institute for International Economics NYU-NCAER Workshop October 7,

Summary of Lessons Avoiding crises: West more like than unlike Rest but one dimension of that likenessCrony capitalism not been learnt Fostering growth: Unnecessary panic, reflecting in part, inability/refusal to come to grips with catch-up and implied relative decline Fostering inclusiveness: Real problem (esp.)in the US but no obvious solution or lesson from the Rest Important lesson to not use inappropriate instruments (protectionism) to address problem 2

Crony Capitalism Rumor No. 1: Goldman Sachs controls the U.S. government. Every time we hear the phrase the United States of Goldman Sachs we shake our heads in wonder. Every ninth-grader knows that the U.S. government consists of three branches. Goldman owns just one of these outright; the second we simply rent, and the third we have no interest in at all. (Note there isnt a single former Goldman employee on the Supreme Court.) What small interest we maintain in the U.S. government is, we feel, in the public interest. (Michael Lewis, Bashing Goldman Sachs Is Simply a Game for Fools, 2009) 3

Crony Capitalism: West and Rest Political economy always existed and recognized in West (lobbying and interest groups). Breaking rules (Rest) versus making rules (West) But eye-opener from crisis is that cronyism with macro- impacts not just in Rest (Suharto, Mobutu, Trujillo, Duvalier etc) but also in West Oligarchiesfinancial sectorin the West too (Johnson and Kwak, 2008; Goldstein and Veron, 2010) But post-crisis response suggests that this is still not taken seriously : Too big too fail unaddressed and share of top 10 banks substantially greater after the crisis. 4

Long Run Growth We dont know what will happen to long-run growth in West (Eichengreen). To be sure, important cyclical issues: unemployment. But all this panic is about growth is over-done. Reflects an inability to come to grips with catch-up which necessarily implies relative decline.catch-up Get used to it guys, or less stridently, draw lessons from Deatons happiness work or from Keynes:Keynes The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems the problems of life and of human relations, of creation and behaviour and religion. (Keynes, ) 5

Problem of inclusive growth Real problem in the US may be inclusiveness: Think of the American economy as a large apartment block. A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most. (Lawrence Katz) 6

Inclusive GrowthLessons from rest Does Rest have much to offer apart from the fact that it is a shared problem? – Improving education – Targeted social programs Real lesson is to not unlearn the advice that was handed to rest about inappropriateness of protectionism – Protectionism in US (intellectual climate change as Montek Ahluwalia calls it) – Immigration restrictions in Europe Rest has much greater interest in preventing bad responses in West to broken elevator problem 7