‘We Need a New Vision in Development’
World Bank chief economist Pinelopi Goldberg says equality can’t be an afterthought in plans for economic growth.
Pinelopi Koujianou Goldberg, a Yale University economist known for her work on the relationship between international trade and inequality, has been a leading voice for enlarging the concept of economic growth so it includes those left behind by globalization and technological change. Goldberg, the first female editor in chief of the prestigious American Economic Review, became chief economist of the World Bank at the end of November 2018. She recently shared her thoughts on new economic thinking with Foreign Policy.
Foreign Policy: At the recent spring meetings in Washington, International Monetary Fund Managing Director Christine Lagarde presided over a roundtable that included you; Gita Gopinath, the IMF’s chief economist; and Laurence Boone, chief economist for the OECD. Lagarde commented that it was the first time the economists representing these three major organizations were all women. What does this mean to you, and do you think it’s made any difference in terms of a different outlook on economic policy?
Pinelopi Goldberg: To be honest I never thought much about it. And I think if you ask women of my generation you will often get this answer. Perhaps the reason we made it so far is that we never thought about this issue too much. Not that we didn’t face special challenges or obstacles, but when I see the reaction of the younger generation, they have such enthusiasm and such happiness. It really means something to them. I think it’s important. I do think that perhaps there is a different perspective we bring, especially at the World Bank, especially on such issues as the inequality of development or growth.
FP: Broadly speaking, the West is dealing with the problem of inequality created in part by globalized markets. A lot of your work has focused on that. Talk a little about what you’ve learned through your academic work and from being here at the bank.
PG: “Inequality” is a hot term these days, but there are many different aspects of inequality and many different dimensions. One important dimension is what we call “global inequality.” One of the great achievements of our time is that global inequality has been reduced dramatically, so that the distance between the average American and the average Chinese or the average Indian is less … and there are also some people who claim that perhaps the increase of within-country inequality in advanced economies was to a certain extent the result of reducing global inequality. So there may be a tradeoff between the two. At the same time, inequality in the advanced countries has increased. What are the main factors behind it? There has been a longstanding debate in the literature, and the two primary culprits have always been technology and globalization. In the ’90s, the focus for this entire debate was on skill premiums, wages for the less educated and more educated, and I think it’s fair to say I contributed to this literature. In the end, one would be hard-pressed to say that trade was the primary driver of the increase in the skill premium. Most people would say technology was the primary driver.
The big insight we’ve gotten in the last few years is that there is a different dimension of inequality that may be more important, and that’s spatial inequality—the geographical dimension of inequality. Trade has affected people differently, but not because of skill but because of where they’re located. … For example, Vietnam has grown tremendously in the last few years. But those areas that were more export-oriented experienced more growth. In Brazil it was also documented that exposure to trade resulted in differences in inequality spatially. Traditionally we didn’t pay that much attention to this dimension, and the reason is that most economists think this effect will show up in the short run, but in the long run people will move and this will arbitrage away these differences. It turns out they don’t move so quickly. … What is surprising is that this adjustment cost is very large and serious. So these spatial differences stay there for a very long time.
FP: Can you be more specific?
PG: Eventually people move, but in the meantime these regions decline. What’s puzzling is how long it takes for this adjustment process. What the theory predicts is that these areas decline, labor becomes cheap, land becomes cheap, and this in principle should attract capital. So why don’t we see that? Why don’t we see these areas coming back? Instead we see the opposite, we see capital fleeing. A process of very long decline.
FP: Are you applying these insights to policy recommendations?
PG: This insight has sunk in, even in the vocabulary we use. We used to say “growth.” Now we say “inclusive growth.”
FP: You have said economists and policymakers need to take inequality into account in the beginning of the growth process.
PG: Even if you read the writings of the WTO [World Trade Organization], now they also emphasize that. In the old days you could be focused entirely on growth: Let’s just make sure these economies grow. Don’t get me wrong—this is important. At the World Bank, IMF, WTO, the view was always that we emphasized free trade, liberalization, all the things we need to do to make sure growth takes off. We realized the gains may not be distributed equally, but there was a division of labor: The international institutions pushed for free trade, and then the domestic policy actors took care of redistribution. Now it’s imperative for these institutions to make the case for redistribution right at the outset rather than saying this is the job of someone else. I think this is happening.
It’s easy to say, but it’s very hard to do it. The work we do at the World Bank but also in academia should be more focused on this: Who gains and who loses in the short run? What should proper compensation policies be? The truth is we don’t know much about this. We don’t know how short the short run is, how long the long run is.
FP: Is there any country where this is being done?
PG: The best examples are from Europe. So, for example, people in Denmark will always tell you that it’s a small open economy. It’s been exposed to the same forces of globalization as every other country. It has faced the same import competition that the United States has faced. But the attitude toward free trade tends to be more positive, and we don’t have the tensions we have here. And this is because there is a social safety net, and there are processes in place to make sure when you lose your job you don’t get lost. Germany is another example.
FP: I don’t think there’s any major developed economy in the world where you’ve seen the kind of backlash against open trade that you see in the United States , as evidenced by the election of President Donald Trump. Even among European countries, the negative reaction to globalization is mostly about immigration, not trade. Is this because the United States handled globalization worse than others?
PG: It’s true in Europe they don’t object to free trade, but they have the same issues with immigration. Part of the issue is the United States is a very large economy. There’s a lot of trade between California and New York [where there is no backlash]. In the smaller European economies, but even in larger ones like Germany, trade is appreciated. Small countries cannot live without trade. … Free trade advocates always point out that trade has [job displacement] effects. If you don’t address them you will have social unrest, and eventually you will pay the price.
FP: Massachusetts Institute of Technology professor Peter Temin published a book not long ago saying the United States now has the structure of a developing economy in terms of its huge class divide and the inequality of economic opportunity. Is that accurate?
PG: I think there is polarization in the United States. It’s similar to what we see in developing countries.
FP: What’s the challenge been like applying your academic work to the real world?
PG: The thing I like about the bank is that it forces you to address the big issues. We are at a point where we need a new vision in development. What I mean by that is that in the past there was very clear model for development, which consisted of this combination of liberalization, deregulation, and privatization. It didn’t work everywhere, but it worked in many parts of the world, especially East Asia, China—to a certain extent I would say it was a triumph of mainstream economics. But the fact is there are many parts of the world that did not participate and are still left behind, most importantly Africa. … There is a lot of skepticism about whether you can apply this model to Africa or now. There is a general backlash against globalization and the fact that you have technological advances. [But] so far the evidence doesn’t suggest that automation is going to eliminate jobs.
FP: I recall the debates in the 1990s about the so-called East Asia model, and the critique that World Bank and Western economists weren’t taking fully into account how in those countries the state was playing a larger role than acknowledged.
PG: We tend to go back and forth between extremes. People look for the one prescription that is going to fix countries. If there’s one lesson not just from economics but from history, it’s that reality is much more nuanced. I would love to see the head of an institution or a president to say things are complicated and we need to take many different factors into account. But you often don’t hear that, because everyone is under pressure to send one clear message.
This interview has been edited for length and clarity.