On Incentives

"Never penalize those who work for us for mistakes or reward them for being right about markets. It will go to their heads, is counterproductive and, in any event, material compensation will not correlate with their ability to predict the future next time."

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The Link:  Poverty and Globalization

Tomorrow morning, around 7:30 a.m., I will be in a seminar that I have been attending each month for the last 18 years.  The subject tomorrow is Chaucer’s Canterbury Tales – “The Clerk’s Tale.”  In the prologue, she gives advice to speakers:

“…keep your flowers of rhetoric in store,
Your figures of speech and so forth, give wings
To the high-flown language that men keep for kings.
Just for once speak in simple terms, we pray,
So we can understand the things you say.”

In short, don’t mask what you’re saying with nonsense, hedging, ambiguity or rhetorical flourishes.  The problem is that if you follow that dictum, you end up sounding tutorial, blunt and certain.  Iris calls it “mansplaining.”  So, I apologize if I sound that way.  It’s an occupational hazard and I have been unable to overcome it.  I would like to talk about: “The Link, Poverty and Globalization.”  So where to begin.  Perhaps by setting the stage which many of you here are directly familiar with.

In 1970 the poorest one billion people in the world had a Gross National Product per capita of 50 cents a day.  In the United States, the Gross National Product was 40 times as great. 

The poorest one billion consumed 40 percent fewer calories than did we.  Malnutrition was the primary or contributory cause of over 50% of all deaths of children at the ages between 1 – 4 years in developing countries.  Almost half of the deaths in Egypt occurred before a child was 5 years old.  In Pakistan, the 1 – 4-year old death rate was 40 times the rate in Japan. 

In industrialized countries, the ratio of physicians to service the needs of the population ranged from 1 in 500 to 1 in 900.  In the poorest 35 countries, the range was from 1 in 4,000 to 1 in 69,000.

In Indonesia 11% of the population had access to safe water, in Haiti 12%, in Paraguay 13%, in Thailand 25%. 

In India, the labor force grew by 48 million people in the 10 years from 1970 – 1980.  That incremental growth in the labor force was approximately equal to the combined labor force of Great Britain and Germany.

The adult literacy rate for the 90 poorest countries in 1970 was about 50%.  15% in Zaire, 21% in Pakistan, 23% in Bangladesh, 35% in Algeria.  In the mid-1970s only 25% of Latin America’s young people attended a secondary school, 20% in Asia.  Those conditions set the stage – the motivation, the wherewithal for globalization.

Leaders of emerging nations knew however that growth in the industrialized world in large part was attributed to cheap energy, inexpensive raw materials and captive markets in developing countries which industrialized Western countries could exploit and control.

The so-called developing world simply became politicized.  They could exercise power – both because of their geo-political position, their impoverished populations, and also because they had the copper and oil and rubber and tin and palm oil, and coffee and cocoa – and we did not.

But, you may ask, how come for hundreds of years, they did not take the initiative to increase their exports and leverage their advantages.  Primarily because Western industrialized countries simply controlled Africa, Latin America and Asia and blocked investment and manufacturing in those countries.  They protected their own industries.  But the first World War changed that as four separate monarchies lost their control.  The second World War finished the job, as scores of countries became independent sovereign states. They would not take kindly to measures that restricted their capacity to export, earn the foreign exchange needed for growth, and tap into the savings of the industrialized world.

The result: One hundred countries now compete for markets with highly sophisticated products and, given their impoverished large populations, often with wages only a fraction of those in industrialized countries.  Countries, small and large, exploited low wages, implemented tremendous productivity by using modern technology, subsidized, delayed gratification, competed, formed alliances, over-produced, under-produced and formed cartels.  And there was no Soviet or Chinese threat from which countries felt beholden to the West for military protection.

These countries today are not easily influenced by the old paradigms of power.  Malaysia is not worried about a Chinese or Japanese invasion.  It is far more concerned about how to compete with Japan and Thailand in setting up joint ventures in China for products to be sold worldwide.

Moreover, we have to face the fact that Western industrial companies have thousands of manufacturing joint ventures all over the developing world.  They are vulnerable.  These joint ventures use less expensive labor, abundant raw materials, and high tech to facilitate the final production and distribution of their products.  And, if Boeing wants to sell planes to China and the Chinese insist those planes must be made in China – not Seattle, Boeing will have to comply.  Else AirBus will.

And, China can dump rice or textiles or furniture or electronics and can raise prices so our iPhone costs $2,000. India and China still have one billion in poverty.  Don’t mess with them.  Many have suffered terrible famine, centuries of exploitation, death by starvation, long marches, violent civil war, cultural revolutions.  They will not be dissuaded from growth by piddly tariffs. They will fight back and can and will do us far more damage than vice versa.  And besides it would take great chutzpa for the U.S. to impose tariffs on Chinese-made goods while asking, that same day, that China uses its good offices to temper North Korean ambitions to become a nuclear power.

The President says he can fix it.  He can make us the center of the universe.  He will make us immune and all powerful. Who will tell him the world has changed?  Who will tell him that in 1940 there were 67 independent countries; today there are 193.  Who will tell him raw materials and commodities are in “other” countries and no longer controlled by imperial powers; that populations, once never a part of the international labor market or the industrial revolution, now compete for work with an almost inexhaustible labor pool.  Who will tell him that that controls over cross-border flows of money, goods, and services have been irreversibly breached by market forces.  Who will tell him that Ricardo’s “law” of comparative advantage has swept away virtually all artificial limits on trade.  Comparative advantage by definition admits that the playing field is not level.  Does the West want to level it by having a maximum wage of $1 per hour?  Patents and inventions and technology are no longer controlled by any one nation.  Information is available in milliseconds.  The result: a loss of control and increased vulnerability of nations once secure in their dominance and links that transfer adverse events from one country to another in an unpredictable and uninsurable fashion.

And, developing countries have seen results.  Many have doubled their GNP within only twenty years after World War II.  China has increased its per capita income since 1990 from $350 to $3,500.  In India, life expectancy in 1900 was twenty-three years of age.  By 1956, it was forty-one.  It is now sixty-four.  Many developing countries have added six years to their average life expectancy in each of the last four decades.  Widespread immunization programs in low-income economies have reduced infant mortality from 124 per 1,000 births in 1965 to below 40 now.  These countries are not about to temper or reverse or slow down those gains.

Besides, the Lindas and the Arunmas of the world will not let that happen and, in many different ways, the expertise of many in this room has been brought to bear to facilitate lives worth living.  Paul Bosland has spent much of his career in providing health services for his community and beautifully shepherding INMED as its Chairperson of the Board.  And Heike has channeled billions of private savings into environmentally positive projects throughout the world.  Ken Lay has supervised the training and education of hundreds from developing countries on how to handle the intricacies of finance for their economic development.  And Antoine has shown the financial world where and how private equity investments can be wisely invested in emerging markets – a term, by the way, which he invented.  And, the World Bank showed the developing world how to finance their economic development with financial resources outside their borders.  That genie cannot be put back in the bottle.

Galileo, Darwin and Freud were pilloried for exposing societies’ loss of centrality and control.  Galileo for supporting the view that the earth was not the center of the universe; Darwin for arguing that we were not all that special, but we were merely descended from “lower” forms of animals; Freud for teaching that we were not in control or even aware of our motivations and driven by mostly unrecognized forces.  These views threatened societies by pointing out their loss of uniqueness, diminished relevance, and power.  While vulnerability does not sell politically, it often is safer to admit.

Now, what can be done so our grandchildren can cope.  Many, many things.  And Antoine can supply good evidence of the rebirth of manufacturing in the United States.  Unfortunately, that would delay dinner far into the night.  Next year hopefully may we meet again in Potomac?

Gene Rotberg for 19 years served as Vice President and Treasurer of the World Bank.