WEBVTT - Michael Spence Discusses Inequality and Growth 0:00:02.240 --> 0:00:06.800 This is Masters in Business with Very Ridholts on Bloomberg Radio. 0:00:07.200 --> 0:00:10.320 This week on the podcast, I have an extra extra 0:00:10.400 --> 0:00:14.400 special guest. His name is Michael Spence, and this is 0:00:14.400 --> 0:00:18.240 a conversation just filled with wonky goodness. He is the 0:00:18.280 --> 0:00:21.239 winner of the Nobel Prize and Economics from two thousand one, 0:00:21.720 --> 0:00:28.600 effectively on information theory, about how information impacts market structures. 0:00:28.840 --> 0:00:34.600 We talk about asymmetries and gaps and really how digital 0:00:35.280 --> 0:00:40.000 economies are just changing the entire world. Um Spence has 0:00:40.040 --> 0:00:43.720 had a number of really fascinating forecasts that have all 0:00:43.760 --> 0:00:47.120 turned out to be quite prescient. Uh. He's almost blase 0:00:47.280 --> 0:00:51.520 about it. He he describes them as all beevitable. Uh. 0:00:51.560 --> 0:00:54.840 This is really a fascinating conversation. If you're interested at 0:00:54.880 --> 0:01:00.800 all in information signaling, in how economies di elop and grow, 0:01:01.560 --> 0:01:06.560 about the impact of not just technology but government institutions 0:01:06.560 --> 0:01:09.600 and intellectual capital, you're going to find this to be 0:01:09.680 --> 0:01:14.119 an absolutely fascinating conversation. So, with no further ado, my 0:01:14.280 --> 0:01:21.240 interview with n y Us Michael Spence. This is Masters 0:01:21.280 --> 0:01:25.760 in Business with Barry Ridholts on Bloomberg Radio. My extra 0:01:25.840 --> 0:01:29.160 special guest this week is Michael Spence. He is the 0:01:29.160 --> 0:01:31.840 two thousand and one Nobel Prize winner in Economics for 0:01:31.920 --> 0:01:36.800 his work on the dynamics of information flows in markets. 0:01:36.840 --> 0:01:39.560 He is the former dean of the Stanford Graduate School 0:01:39.600 --> 0:01:42.880 of Business. He is currently a professor at n HYU Stern. 0:01:43.720 --> 0:01:47.920 He is a senior advisor at General Atlantic, a very 0:01:48.000 --> 0:01:52.520 large private equity firm which manages about thirty five billion dollars. 0:01:52.560 --> 0:01:55.800 Michael Spence, Welcome to Bloomberg. Thank you very It's great 0:01:55.800 --> 0:01:59.560 to be here. So I'm fascinated by the work you 0:01:59.640 --> 0:02:02.880 do um your Nobel Prize. I'm going to take what 0:02:03.120 --> 0:02:06.360 is normally a somewhat esoteric research area and see if 0:02:06.360 --> 0:02:10.679 I can make it understandable how people make decisions when 0:02:11.200 --> 0:02:16.160 critical information is hard to find. Is that a fair oversimplification, Yeah, 0:02:16.200 --> 0:02:18.960 it's certainly part of it. Yep. So so tell us 0:02:18.960 --> 0:02:21.000 about that. What how did you find your way into 0:02:21.040 --> 0:02:26.799 that space and what are the dynamics of information flows? Well, 0:02:27.000 --> 0:02:30.000 so I got I got interested in this when I 0:02:30.040 --> 0:02:34.120 was a graduate student, probably little color commentary. By the 0:02:34.160 --> 0:02:38.120 time I had finished my general exams, which is the 0:02:38.160 --> 0:02:40.800 first two years of a PhD program. I've been in 0:02:40.880 --> 0:02:45.440 school up through high school, thirteen years in Canada. UM. 0:02:45.639 --> 0:02:48.080 Then I had four years at Princeton, These were all 0:02:48.080 --> 0:02:52.919 wonderful experiences. And two years at Oxford UM a road scholar, 0:02:53.000 --> 0:02:56.760 A road scholar, yeah, doing mathematics eventually and UM, and 0:02:56.800 --> 0:02:59.000 then two years in the PhD program. And I've had 0:02:59.000 --> 0:03:03.880 about enough, and so I went to one of my advisors, 0:03:03.919 --> 0:03:06.880 he's a great friend, Dick Sauser at the Kennedy School, 0:03:07.160 --> 0:03:09.399 and I said, I think I'm gonna quit. And he said, 0:03:09.400 --> 0:03:12.640 what are you gonna do? And I said, well, I mean, 0:03:12.800 --> 0:03:15.440 you know, I'm tired of, you know, talking to myself 0:03:15.520 --> 0:03:20.880 and sitting in a library and stuff. So UM he said, uh. 0:03:21.160 --> 0:03:24.079 He said, the problem is you don't have enough human contact. 0:03:24.120 --> 0:03:27.360 You should teach. And so he did two things for me. 0:03:27.440 --> 0:03:29.360 He he gave me a little bit of his course 0:03:29.480 --> 0:03:33.600 on social choice theory, which I screwed up royally my 0:03:33.639 --> 0:03:35.920 first outing as a teacher. And the second thing he 0:03:35.960 --> 0:03:39.440 did is he made me what he called rapport tour 0:03:40.240 --> 0:03:43.800 of a faculty seminar in the then new, new, one 0:03:43.840 --> 0:03:47.000 year old Kennedy School. It was extraordinary group of people, 0:03:47.120 --> 0:03:51.640 you know. It was Francis Bathor and um Lestero came 0:03:51.680 --> 0:03:54.960 down to visit from m I T and Ken Arrow, 0:03:55.480 --> 0:03:58.320 Tom Shelling, Uh, just as a quite a run of 0:03:58.320 --> 0:04:01.280 Nobel laureates and that, oh no, it was pretty amazing. 0:04:01.640 --> 0:04:05.280 Not all of them have been recognized in that capacity then, 0:04:06.400 --> 0:04:09.120 And so that was fascinating. And my job was to 0:04:09.200 --> 0:04:11.880 turn what was a kind of general discussion you know 0:04:11.920 --> 0:04:15.760 how those go all over the place into nine pages 0:04:15.760 --> 0:04:21.599 that made it look like just brilliant you know, linear exposition. 0:04:22.240 --> 0:04:23.640 So I did that and I had a lot of 0:04:23.640 --> 0:04:26.320 fun doing it. And Kenn Arrow, to who is dying day, 0:04:26.360 --> 0:04:29.159 said that that was the thing he thought was my 0:04:29.240 --> 0:04:34.640 greatest skill, Rappert touring um. In the course of that, 0:04:34.760 --> 0:04:37.560 Lessera came down and started talking about what he called 0:04:37.600 --> 0:04:41.920 statistical discrimination. So I don't want to, you know, make 0:04:41.960 --> 0:04:46.680 this too nerdy, but basically, whenever you have okay, when 0:04:46.720 --> 0:04:50.120 when you have missing information, then basically you get people classified, 0:04:50.680 --> 0:04:54.000 you know, by what you can see or detect as 0:04:54.000 --> 0:04:57.640 opposed to what you don't see. Uh, and Less's idea, 0:04:57.960 --> 0:05:01.159 and that automatically produces discriminate nation. So what happens in 0:05:01.240 --> 0:05:04.880 any you know, economic or social context is that the 0:05:05.320 --> 0:05:08.520 members of a group who are otherwise indistinguishable from each 0:05:08.560 --> 0:05:12.400 other I mean, in in your world, think of asset classes, okay, 0:05:12.839 --> 0:05:14.960 um is a little bit like this. Things get lumped 0:05:15.000 --> 0:05:16.920 into an asset class because they're supposed to be sort 0:05:16.920 --> 0:05:21.360 of similar and the end telemarkets get deep informationally, you know, 0:05:21.560 --> 0:05:24.640 you don't see all the differences, so they tend to 0:05:24.680 --> 0:05:29.440 be averaged. Right When you average a bunch of diverse 0:05:29.560 --> 0:05:33.920 entities that are in one of these you know, silos 0:05:33.960 --> 0:05:38.719 that are distinguishable from other silos by what's visible or detectable, 0:05:39.000 --> 0:05:42.280 then you basically get the people at the upper end 0:05:42.279 --> 0:05:45.599 of some quality spectrum get treated as the average and 0:05:45.680 --> 0:05:48.080 that's not good. And at the lower end they get 0:05:48.080 --> 0:05:50.920 treated as the average and that's great for them. So 0:05:51.040 --> 0:05:54.039 you're discriminating against the high quality end of the spectrum 0:05:54.080 --> 0:05:56.800 and you're favoring the low quality. So this has to 0:05:56.839 --> 0:06:00.919 have huge implications for people looking at, let's say, making 0:06:00.960 --> 0:06:05.960 investments in either private or public companies. Absolutely, yeah, son, 0:06:06.040 --> 0:06:09.120 But then it gets complicated, I mean for sure, um 0:06:09.520 --> 0:06:13.200 So what so the phenomenon that this gives rise to 0:06:13.240 --> 0:06:16.320 in markets is the one George Jakerlof wrote about. Although 0:06:16.360 --> 0:06:18.840 the insurance people have known it for years, it's called 0:06:18.880 --> 0:06:23.200 adverse selection. And what happens in that in that context 0:06:23.279 --> 0:06:26.600 is basically have what I just described, this quality spectrum 0:06:26.600 --> 0:06:29.120 that has the unfortunate properties. You can't tell the difference 0:06:30.000 --> 0:06:32.520 between the the entities, think of them as things for 0:06:32.560 --> 0:06:36.279 sale and differing in quality. Used cars is the example 0:06:36.360 --> 0:06:38.920 he used. So what happens in a market like that 0:06:39.400 --> 0:06:42.680 is that the price reflects the average quality, and the 0:06:42.760 --> 0:06:45.440 people at the top end of the quality spectrum say 0:06:45.520 --> 0:06:48.279 that's not a very good price for me, right, and 0:06:48.320 --> 0:06:50.880 they take their product out of the market from the 0:06:50.920 --> 0:06:54.440 top end, and then the average quality falls and eventually 0:06:54.440 --> 0:06:57.200 people figure that out and the price goes down, and 0:06:57.240 --> 0:06:59.120 then the people at the top end of the remaining 0:06:59.160 --> 0:07:01.160 spectrum say that's not a very good price. I'll take 0:07:01.200 --> 0:07:04.839 mine out right. So that's that's the origin of the 0:07:04.960 --> 0:07:07.440 term adverse selection. People are selecting in and out of 0:07:07.480 --> 0:07:10.920 the market, and it's adverse because the top end of 0:07:10.920 --> 0:07:14.640 the quality spectrum leaves. First, let's talk about your book, 0:07:14.720 --> 0:07:19.920 The Next Convergence, because it's such a fascinating application of 0:07:19.920 --> 0:07:23.520 of information flows. Uh, there's a quote in the beginning 0:07:23.560 --> 0:07:28.920 that I just found absolutely mind boggling. From seventeen fifty 0:07:29.040 --> 0:07:33.240 to nineteen fifty, the average income of people living in 0:07:33.440 --> 0:07:39.080 countries that underwent the Industrial Revolution, so their incomes rise 0:07:39.760 --> 0:07:45.160 twenty to forty times versus the non industrialized countries. And 0:07:45.200 --> 0:07:48.280 this was only fifteen percent of the world's population. Is 0:07:48.280 --> 0:07:53.600 that about right X that's amazing. Yeah, So the growth 0:07:53.720 --> 0:07:58.160 rates weren't breathtaking, you know, probably on the neighborhood of 0:07:58.200 --> 0:08:01.360 two in real terms, are on a per capita basis, 0:08:01.720 --> 0:08:04.160 but if you if you do it for two hundred years, 0:08:04.160 --> 0:08:07.520 you get a fairly big ink magic of compounding exactly, 0:08:07.640 --> 0:08:10.960 so that that was basically it. Then then you know, 0:08:11.040 --> 0:08:15.120 the the other a living in countries that we now 0:08:15.160 --> 0:08:18.520 call emerging economies. Most of them some of them haven't 0:08:18.560 --> 0:08:21.800 emerged very much, but uh but there. But that's the 0:08:21.840 --> 0:08:26.000 other group, and they were held back by m essentially 0:08:26.520 --> 0:08:30.760 uh global economy that wasn't really open and the colonial 0:08:30.920 --> 0:08:33.680 structure that was the governance. So the rest of the 0:08:33.679 --> 0:08:38.040 book you basically say, well, seventeen fifty to nineteen fifty 0:08:38.480 --> 0:08:42.400 was the Industrial Revolution. The next hundred years, I think 0:08:42.440 --> 0:08:48.439 you referenced nine six of the world's population will join 0:08:48.800 --> 0:08:53.160 the affluent. That's a big, bold number. We're about halfway 0:08:53.160 --> 0:08:58.079 through that process. Our maybe a little more. How accurate 0:08:58.360 --> 0:09:01.640 was that forecast? And and how is this actually happening? 0:09:03.000 --> 0:09:05.000 So I think it's well underway. I mean, it may 0:09:05.000 --> 0:09:08.240 have been a bit optimistic, but you know, China looks 0:09:08.280 --> 0:09:10.480 like it's well on the way. It's a high middle 0:09:10.520 --> 0:09:13.600 income country with a very good chance of being, you know, 0:09:14.400 --> 0:09:17.120 a high income country, admittedly at the low end of 0:09:17.120 --> 0:09:20.160 the spectrum in another ten to fifteen years. India is 0:09:20.200 --> 0:09:22.959 a bit further behind, but there, you know, humming along. 0:09:23.360 --> 0:09:25.920 You had them those two together, and you've got two 0:09:25.960 --> 0:09:29.880 point I think it's seven billion people, which is a 0:09:29.920 --> 0:09:34.120 significant fraction of the world seven right, Yeah, that's half 0:09:34.160 --> 0:09:37.280 of my sixty percent. You've got you know, the rest 0:09:37.360 --> 0:09:39.600 of Asia. That some of it came earlier, some of 0:09:39.640 --> 0:09:42.600 it came later, and so on. So it's it's I 0:09:42.640 --> 0:09:45.600 think this convergent process is going to be very hard 0:09:45.640 --> 0:09:49.800 to stop because people, because the structures are there to 0:09:50.000 --> 0:09:53.120 enable it, and because people have gotten the hang of 0:09:53.160 --> 0:09:56.360 it that it's actually possible. You discussed in the book 0:09:56.600 --> 0:10:01.080 that post World War Two Japan was a very unusual 0:10:01.160 --> 0:10:05.640 example compared to other so called developing nations. What what 0:10:05.760 --> 0:10:10.599 made Japan so unique, especially over that seventeen fifty to 0:10:10.679 --> 0:10:14.440 nineteen fifty era. Yeah, so Japan is a kind of hybrid. 0:10:14.760 --> 0:10:17.839 Um so most of Asia, by the way, and right 0:10:17.840 --> 0:10:20.480 after World War two, Asia was by far the poorest 0:10:20.520 --> 0:10:24.320 part of the world, worst in Africa, worst in Africa. Yeah, 0:10:24.400 --> 0:10:27.440 And they and the economists at the time, you know, 0:10:27.600 --> 0:10:30.440 when asked development economists, when I asked, you know, where 0:10:30.559 --> 0:10:32.520 was the real trouble going to be? They said Asia. 0:10:32.679 --> 0:10:35.560 Many of them said Asia, because Asia doesn't have natural 0:10:35.600 --> 0:10:39.360 resource wealth on balanced and Africa is by far the 0:10:39.440 --> 0:10:44.200 richest royal diamonds, you know, you name it um. And 0:10:44.240 --> 0:10:46.400 that turned out not to be a good guest, because 0:10:46.480 --> 0:10:50.440 that turns out that the kind of real capital that 0:10:50.600 --> 0:10:53.760 enables this growth as people provided they're educated and so on, 0:10:53.880 --> 0:10:58.120 and not not just uh, you know, mineral wealth. Yeah. 0:10:58.200 --> 0:11:03.320 So so basically, I think, you know, what the situation was, 0:11:03.800 --> 0:11:08.439 Japan was a hybrid because it had gotten to middle 0:11:08.480 --> 0:11:11.360 income status. And the reason it got there is that 0:11:11.440 --> 0:11:15.200 in eighteen sixty eight, the Meiji Restoration, it abandoned the 0:11:15.240 --> 0:11:20.560 policy of isolationism, embrace trade. Embrace trade, braced openness, and 0:11:20.600 --> 0:11:23.360 they had started to modernize. And then that, of course, 0:11:23.400 --> 0:11:26.240 World War two wasn't and they were an imperial power 0:11:26.760 --> 0:11:33.120 you know, all over Asia, you know, China, Korea, etcetera. Um, 0:11:33.160 --> 0:11:35.520 So that World War Two was a huge setback, but 0:11:35.559 --> 0:11:38.760 basically they got back on track. So over the same 0:11:38.800 --> 0:11:42.960 period that that post industrial period, pre war post industrial period, 0:11:43.280 --> 0:11:48.600 how come China fared so much worse than Japan. So 0:11:48.800 --> 0:11:53.560 there there's two kind of crucial ingredients. And in the 0:11:53.600 --> 0:11:56.160 post war growth that we've I've seen and by the way, 0:11:56.160 --> 0:11:58.080 this is growth that we've never seen before. I mean 0:11:58.120 --> 0:12:00.680 we're talking about extended periods like two and a half 0:12:00.720 --> 0:12:04.839 decades of five, six, seven growth even higher in China 0:12:05.360 --> 0:12:07.920 just never happened before. So one of the things I 0:12:07.960 --> 0:12:09.520 was trying to do in the book is explain how 0:12:09.600 --> 0:12:12.559 you could do that? Right? How could you have a 0:12:12.679 --> 0:12:15.720 max of two you know before that or two and 0:12:15.720 --> 0:12:19.080 a half? How could terms yeah in real terms, how 0:12:19.120 --> 0:12:22.240 could you have advanced countries growing at max three in 0:12:22.320 --> 0:12:24.440 real terms? And these people are growing at seven, eight 0:12:24.480 --> 0:12:27.920 and nine. And the answers they're catching up, right, all 0:12:28.000 --> 0:12:31.400 of that technology that you need to drive growth in 0:12:31.440 --> 0:12:37.319 the long run. You know, the the solo insight UH 0:12:37.559 --> 0:12:39.720 was already developed, so it just had to be brought 0:12:39.760 --> 0:12:43.000 in and adapted. In other words, this isn't one country 0:12:43.040 --> 0:12:46.199 amongst many that are all emerging at once. When you 0:12:46.280 --> 0:12:50.280 take an emerging economy and they're surrounded by developed economies, 0:12:50.640 --> 0:12:54.960 that's an accelerant provided they're open and provided their investing 0:12:54.960 --> 0:12:58.880 at high enough rates. So so well, clearly China is 0:12:58.960 --> 0:13:03.360 making massive investor. Do you consider them open enough to 0:13:03.400 --> 0:13:06.760 continue taking full advantage of what the rest of the 0:13:06.760 --> 0:13:10.360 globe can do for their growth at the moment? Yes, 0:13:10.559 --> 0:13:14.280 and certainly historically once they decided to open in ninety 0:13:14.360 --> 0:13:18.760 eight undergoing chapin Um. Now, is it logically possible that 0:13:18.840 --> 0:13:21.560 they could close themselves off enough to to put a 0:13:21.600 --> 0:13:26.319 major dent in their growth, Yes, it's it's it's unlikely, 0:13:26.400 --> 0:13:29.000 I think, but it's possible. You asked about the history 0:13:29.040 --> 0:13:33.880 of China. So China had a revolution in nine the 0:13:33.920 --> 0:13:39.120 Communists took over. The Communists, on the positive side, probably 0:13:39.200 --> 0:13:42.240 had the intention of making everybody better off. Right that, 0:13:42.400 --> 0:13:46.160 you can find a lot of governing structures in the 0:13:46.240 --> 0:13:50.000 developing world where the governing elite, whoever they are and 0:13:50.040 --> 0:13:52.920 however they got there, are doing something other than trying 0:13:52.920 --> 0:13:58.280 to make people better off. Lots of corruptions. There's mineral resources, 0:13:58.440 --> 0:14:01.440 royal all I kind of thing. So if they're doing that, 0:14:01.559 --> 0:14:04.679 nothing good is going to happen. The Chinese weren't doing that, 0:14:04.760 --> 0:14:07.359 and they did put a hell of a lot of resources, 0:14:07.400 --> 0:14:10.640 given the side the low levels of income in the 0:14:10.640 --> 0:14:14.360 economy into education. What they didn't do is run a 0:14:14.400 --> 0:14:17.760 market economy. So for the first twenty nine years they 0:14:17.800 --> 0:14:21.440 basically got nowhere, but they built assets that were useful. 0:14:21.480 --> 0:14:24.720 And when they changed the the development model a growth 0:14:24.760 --> 0:14:31.440 model to opening up and and using markets and initially selectively, 0:14:32.040 --> 0:14:34.000 then it just took off like a rocket. That was 0:14:34.040 --> 0:14:36.720 the post Knickson era. That was the post Knickson eira, 0:14:36.800 --> 0:14:39.840 So it was they date the Chinese date the reform 0:14:40.680 --> 0:14:46.440 process from Let's talk a little bit about job market signaling. 0:14:46.480 --> 0:14:50.360 We discussed some of that before. You've done a lot 0:14:50.400 --> 0:14:54.040 of work on this tell us about the origins of 0:14:54.120 --> 0:14:58.680 job market signaling and how it's evolved over time. So 0:14:58.840 --> 0:15:02.320 the origin of it was was that discussion that we 0:15:02.400 --> 0:15:05.840 had earlier that had to do with informational gaps, so 0:15:06.240 --> 0:15:10.280 that the adverse selection problem is basically what happens in 0:15:10.360 --> 0:15:12.880 markets if you can't close the gaps, and then we 0:15:12.920 --> 0:15:14.920 talked about brands as a way of closing it. What 0:15:14.960 --> 0:15:18.240 do markets do, They're going to try to close the gaps. 0:15:18.800 --> 0:15:21.000 That's one of the things that between buyers and biber 0:15:21.080 --> 0:15:22.960 doing buyers and sellers is the best way to think 0:15:23.000 --> 0:15:26.840 about it. The second thing is signaling the things that 0:15:26.880 --> 0:15:33.360 the the the sellers can do to convey actually accurate 0:15:33.400 --> 0:15:38.320 information in the market. Um uh. The third thing that 0:15:38.400 --> 0:15:43.680 we do collectively is regulate. Right, So financial markets have 0:15:43.960 --> 0:15:50.160 enormously large gaps, uh. In principle um So it isn't 0:15:50.200 --> 0:15:53.400 a great surprise that every set of financial markets in 0:15:53.440 --> 0:15:57.040 the world has disclosure requirements, and they're pretty stringent, and 0:15:57.080 --> 0:16:01.480 the penalties are pretty high for violating it, and and 0:16:01.480 --> 0:16:05.440 and and when those disclosure requirements are not there are 0:16:05.480 --> 0:16:09.240 not enforced, then you get bad misbehavior in the markets. 0:16:09.680 --> 0:16:11.840 So what you see in the developing world all the time. 0:16:11.960 --> 0:16:14.560 So there's there's that's interesting you bring that up because 0:16:14.600 --> 0:16:18.239 it makes me think of the way we approach regulation 0:16:18.520 --> 0:16:22.160 in some areas is to prevent a behavior, say this 0:16:22.280 --> 0:16:25.720 behavior we're not going to allow. There are other aspects 0:16:25.720 --> 0:16:28.240 where we say, well, we're gonna let you do what 0:16:28.240 --> 0:16:30.600 you want, but you have to make these disclosures, so 0:16:30.760 --> 0:16:35.480 buyers know, most people don't read the fine print. They're 0:16:35.520 --> 0:16:38.040 not reading the credit card disclosures, they're not reading their 0:16:38.080 --> 0:16:43.120 brokerage account disclosures. Given that, how does that information make 0:16:43.120 --> 0:16:45.880 its way into the marketplace? Is the signals still there? 0:16:46.360 --> 0:16:50.320 If of us don't read the disclosures, maybe it's of 0:16:50.400 --> 0:16:52.720 us don't read it. Yeah, no, the answer is no, 0:16:52.840 --> 0:16:55.760 it's not. And then you need if if it's important 0:16:55.800 --> 0:16:58.600 to close that informational gap, then you then and you 0:16:58.640 --> 0:17:00.680 can't close it, then you have to do do something else. 0:17:01.160 --> 0:17:03.440 So we do all kinds of things. So we assume 0:17:04.200 --> 0:17:08.200 that there are classes of investors who are not capable 0:17:08.240 --> 0:17:11.920 of understanding the risk characteristics of certain kind asset classes, 0:17:12.240 --> 0:17:15.080 and they're simply precluded from it. And you know, meaning 0:17:15.080 --> 0:17:18.600 if you're not a credit investor, go into a hedge fund, 0:17:18.680 --> 0:17:21.600 or don't have assets of a certain size, we assume 0:17:21.680 --> 0:17:25.320 you can't withstand the kind of risk characteristics of that 0:17:25.400 --> 0:17:30.400 asset class. So regulation in that sense has multiple avenues, 0:17:30.440 --> 0:17:34.119 and they've done properly. They tend to be pragmatic response 0:17:34.240 --> 0:17:39.000 to to real human behavior as opposed to some kind 0:17:39.000 --> 0:17:42.359 of theory about it. Yeah, quite interesting. What about the 0:17:42.400 --> 0:17:47.439 impact of technology on both signaling in the job market 0:17:47.640 --> 0:17:51.560 and and the impact of regulation. Yeah. So this this 0:17:51.880 --> 0:17:55.000 when I when when the Internet was sort of in 0:17:55.119 --> 0:17:58.280 its early stages, meaning a kind of public property, let's 0:17:58.280 --> 0:18:01.640 call it the mid nineties, people you know, had all 0:18:01.720 --> 0:18:04.479 kinds of theories about what its impact was going to be. 0:18:04.880 --> 0:18:08.280 And I got asked a lot of questions that the 0:18:08.359 --> 0:18:11.520 gist of which we're is this going to close informational gaps? 0:18:12.400 --> 0:18:15.159 And my answer then is the same now, but I 0:18:15.240 --> 0:18:17.680 underestimated something. So my answer was, it's not going to 0:18:17.760 --> 0:18:21.240 eliminate private information meaning information that I have because it's 0:18:21.280 --> 0:18:24.320 me that you know, you're only going to get if 0:18:24.400 --> 0:18:28.240 I somehow transmit it to you. Um. But but what 0:18:28.280 --> 0:18:31.560 the Internet does is it gives you so many access 0:18:31.680 --> 0:18:35.440 at very low cost of so much information that's correlated 0:18:35.760 --> 0:18:37.720 with this kind of thing that I actually think it 0:18:37.760 --> 0:18:41.760 does close informational gaps. And the best example of that, 0:18:41.840 --> 0:18:46.640 I think is, um, what we see now in fintech. 0:18:47.400 --> 0:18:50.679 You know, so you so in like and financial and 0:18:51.200 --> 0:18:53.919 for example, an Ali babbie, you have a massive amount 0:18:53.960 --> 0:18:57.720 of data because they basically they're half the mobile payment 0:18:57.760 --> 0:19:01.199 system in China. They can use that data to issue 0:19:01.200 --> 0:19:05.680 credit to little tiny businesses. There's there's a partially owned 0:19:05.680 --> 0:19:08.320 subsidiary called my Bank that just won an award for 0:19:08.359 --> 0:19:12.520 this using this data to make credit assessments and price 0:19:13.040 --> 0:19:19.040 and price the credit appropriately. And uh and this these 0:19:19.080 --> 0:19:21.080 people are otherwise blocked away. I mean, they can only 0:19:21.080 --> 0:19:24.000 borrow from family and friends. A bank can't either assess 0:19:24.080 --> 0:19:28.600 the risk and and or it's way too costly. So 0:19:28.680 --> 0:19:31.280 this day and this information effectively creates a whole new mark, 0:19:31.320 --> 0:19:33.520 creates a whole new market. I mean, and when we're 0:19:33.520 --> 0:19:36.880 talking about I mean this, my bank has seventeen million 0:19:37.119 --> 0:19:43.040 small business customers. Uh average number of employees five, no collateral, nothing. 0:19:43.320 --> 0:19:46.120 They just look at their credit history, their transaction history, 0:19:46.200 --> 0:19:50.400 transaction history, their payments history, you know, and and their 0:19:50.400 --> 0:19:53.880 online activity. So let's talk a little bit about growth 0:19:53.880 --> 0:19:56.879 and trade. And I want to start with the project 0:19:57.040 --> 0:20:00.000 you did for the World Bank. Tell us a little 0:20:00.040 --> 0:20:02.919 bit about that. It was quite fascinated. Yeah, so they 0:20:03.000 --> 0:20:06.040 they I kind of stumbled into this because I had 0:20:06.080 --> 0:20:11.080 not been a specialist in in um development growth related 0:20:11.119 --> 0:20:15.200 to developing economies, and so I around about two thousand, 0:20:15.640 --> 0:20:18.800 the early two thousands, I got a call um from 0:20:19.280 --> 0:20:22.520 uh some folks at the World Bank who become good friends, 0:20:22.560 --> 0:20:24.800 and they said, would you come and give a lecture 0:20:24.840 --> 0:20:29.199 on investment and growth at the one of the spring conferences, 0:20:29.280 --> 0:20:32.879 the Poverty Reduction and Economic Management? And I said why me? 0:20:33.880 --> 0:20:36.760 And they said, well, you sort of you know, kind 0:20:36.760 --> 0:20:39.600 of a microeconomic focus and pay attention to these things. 0:20:39.600 --> 0:20:42.119 And so I thought to myself, this is this is 0:20:42.480 --> 0:20:45.600 signaling or screening. I thought, okay, so here you meaning 0:20:45.600 --> 0:20:48.160 that yours. They saw the Nobel and said, oh, let's 0:20:48.160 --> 0:20:49.800 have him talk about this. Is that what you mean 0:20:49.800 --> 0:20:52.440 by signaling? No? No, no, no, no was the decision 0:20:52.480 --> 0:20:55.280 I made. So I made the following decision, Barry. I said, 0:20:55.280 --> 0:20:59.320 I'm gonna do this, and there there's one of two outcomes. Uh. 0:20:59.440 --> 0:21:02.399 Either it'll be a disaster and which I'll have learned 0:21:02.440 --> 0:21:04.679 something that I shouldn't be, you know, mucking around with 0:21:04.720 --> 0:21:08.440 the ten thousand people who are the experts in development 0:21:08.440 --> 0:21:10.640 in the world. Or it'll go okay, and then I'll 0:21:10.720 --> 0:21:15.480 learn something else. Right, So it was deliberately a screening device, 0:21:15.920 --> 0:21:18.480 and it seemed to go okay. And from that came 0:21:18.520 --> 0:21:21.520 a Commission on Growth and Development, and the idea behind 0:21:21.520 --> 0:21:25.880 that commission wasn't to do original research. It was approximately 0:21:25.960 --> 0:21:30.879 fifteen years since the Washington Consensus had been enunciated, UH, 0:21:31.920 --> 0:21:36.920 which was it's it came out of Washington. Uh. I've 0:21:36.960 --> 0:21:40.880 temporarily forgotten that John Williamson wrote it. It's been much 0:21:40.960 --> 0:21:44.560 maligned and unfairly to be honest with the Washington Consensus 0:21:44.600 --> 0:21:48.840 is perfectly sensible. Uh. Assessment of what it takes to 0:21:48.920 --> 0:21:51.040 kind of grow and developing and developing. What was that 0:21:51.080 --> 0:21:54.119 assessment said, well, there's a list of things. There's about 0:21:54.160 --> 0:21:58.679 thirteen things that are crucial components. Um. Some people interpreted 0:21:58.760 --> 0:22:03.000 as a kind of you know, uh, turnkey system. You 0:22:03.040 --> 0:22:06.760 can't do that. Every country has idiosyncratic characteristics. But the 0:22:07.119 --> 0:22:09.080 thing that gave the Washington and sense as a bad 0:22:09.160 --> 0:22:13.080 name is it was taken, especially in Latin America, and 0:22:13.160 --> 0:22:19.760 stripped down to liberalize, privatize, etcetera. And UH, and that 0:22:19.840 --> 0:22:24.320 gave rise to kind of accesses and you know, not 0:22:24.600 --> 0:22:28.679 terribly good results. UM. So we decided this it was 0:22:28.680 --> 0:22:31.320 a good time. We had a lot of experience that 0:22:31.400 --> 0:22:35.040 had been accumulated in countries like China and India and others. 0:22:35.400 --> 0:22:38.560 Brazil had started had come out of its um twenty 0:22:38.560 --> 0:22:40.840 five year funk and looked like it was starting to 0:22:40.880 --> 0:22:43.720 grow um, et cetera. It was a good time to 0:22:43.800 --> 0:22:46.960 kryd of figure out what research, what experience and so 0:22:47.040 --> 0:22:50.800 on had taught us about that was useful and could 0:22:50.800 --> 0:22:53.200 we kind of summarize it and give it back. So 0:22:53.240 --> 0:22:55.800 that was the exercise. We wrote a seventy five page 0:22:55.880 --> 0:22:59.159 report based on kind of two years of listening to 0:22:59.240 --> 0:23:03.080 people and uh been thinking about it, and it was 0:23:03.119 --> 0:23:04.800 meant to be an up and none of these things 0:23:04.840 --> 0:23:07.800 are ever kind of you know, definitive, right, it was 0:23:07.840 --> 0:23:10.680 an update. Right now we know this that we didn't 0:23:10.680 --> 0:23:12.720 know before. And the course of doing that work, we 0:23:12.760 --> 0:23:15.360 went and looked for countries that have grown for at 0:23:15.359 --> 0:23:17.840 seven percent or more for twenty five years or more, 0:23:18.000 --> 0:23:22.359 not every year, but on average. And there's thirteen countries. Really, 0:23:22.359 --> 0:23:25.520 because that's a giant number, seven percent. Seven you double 0:23:25.560 --> 0:23:30.679 every decade at se and uh, there's thirteen countries that 0:23:30.720 --> 0:23:34.000 have done that at various points. China's one. Brazil in 0:23:34.000 --> 0:23:37.840 the early post war period was one Korea. They won't 0:23:37.880 --> 0:23:42.280 be surprised you the Timewan easy economy. Japan was in 0:23:42.320 --> 0:23:48.040 that group. Uh, there were some surprises little Botswana. Really 0:23:48.119 --> 0:23:51.199 he was a member of that group. Yeah, uh so, 0:23:51.520 --> 0:23:55.040 different sizes, different government structures. It was it was pretty interesting. 0:23:55.440 --> 0:23:59.960 Were there any consistencies across all thirteen. Yeah, they're they're 0:24:00.240 --> 0:24:02.560 basically all the same growth model, which has come to 0:24:02.560 --> 0:24:05.200 be called the Asian growth model. So it's it's high 0:24:05.280 --> 0:24:10.440 levels of investment funded domestically, openness, including especially foreign direct investment, 0:24:10.480 --> 0:24:13.560 which is the one of the principal channels for technolog 0:24:13.600 --> 0:24:19.080 inbound technology transfer and leveraging the big global marketplace. If 0:24:19.119 --> 0:24:22.000 you try to do this on a standalone basis, it 0:24:22.119 --> 0:24:24.080 just doesn't work. I mean, you look at the demand 0:24:24.119 --> 0:24:26.639 in a country with a per capita income of five dollars, 0:24:26.720 --> 0:24:30.640 it's kind of food, shelter, energy, and not much else. 0:24:31.119 --> 0:24:35.439