QUOTE OF THE WEEK
"The future doesn't belong to the faint-hearted. It belongs to the brave."
-- Ronald Reagan

Interview: Paul Romer, Professor of Economics, Stanford University  

“The potential for the Mauritian economy to grow and for everyone to benefit from that growth is very large, but...

…there is a fear and caution that are holding you back”

* “Subsidies, protection, trade barriers are terrible ways to help the poor”  

Paul Romer, one of the US' leading economists, was the primary developer of New Growth Theory, a body of work that provides a fresh foundation for business and government thinking about wealth creation. In 2002, he was recognized for his work in this field when he was awarded the Horst Claus Recktenwald Prize in Economics for outstanding achievement and contributions to the field. He was also named one of America's 25 most influential people by TIME magazine (1997).  

Paul Romer is currently the STANCO 25 Professor of Economics in the Graduate School of Business at Stanford University and a Senior Fellow of the Hoover Institution. He is also the founder of Aplia, which develops and applies technologies for improving student learning. This work springs from his conviction that improving education at all levels will be the key to sustaining technological progress in the twenty-first century and that better educational technology will lead to better educational outcomes.  

Mauritius Times: You have developed a new perspective regarding wealth creation -- The New Growth Theory. How is it relevant to the challenges facing a country like Mauritius?

Paul Romer: There is an old-fashioned vision of wealth that it comes from owning physical assets, tangible things; we still see some wealth that comes that way – countries that own oil, people that own land can sometimes become very wealthy from owning those things. But when we look at the world as a whole, we see that most wealth and most standards of living come not from those physical objects, but from new discoveries, new ideas, new things that give us new recipes and ways to combine the physical objects together and create things that will be more valuable to us. So, if one vision of how you create is to go and discover oil, a different vision is you create wealth by discovering a new pharmaceutical compound that will help us live healthier and longer lives. I believe that the second way of creating wealth is the key to growth, especially in a place like Mauritius, which is not like those countries that have vast stores of oil. So you have to make wealth from your people and the things you can discover and use.

* What would be the appropriate recipe for Mauritius?

There are huge numbers of little recipes that all add up to create wealth. To illustrate that point, I use the example of coffee shops in the US where they have three different sizes of coffees that they sell and three different sizes of lids for the respective cups. Then someone came up with the idea that you could design the cups such that one lid fits all the three different cups. That idea saves time at the coffee shops. etc. It’s such little ideas, recipes which add up to help people have the things they like, like hot coffee a little bit more efficiently and at lower cost.

* Would you argue that in matters pertaining to economics, it is possible to come up with one-size-fits-all recipes that can trigger wealth creation?

-- Many of the lessons (regarding wealth creation) are the same in most cases. First, you need to have a market system with private property where people are free to try and make profits or to earn a higher salary; then the government has to help provide education such that, at the end of the day, you come up with well-educated citizens and the market where they can go out and try to make profits for themselves. Those two things together are how you both discover lots of little new ideas and also how you find opportunities to bring in ideas from the rest of the world. So China, India and Mauritius can all benefit a lot right now from finding ideas that already exist in the rest of the world.

* Do you mean that we need not reinvent the wheel or add value to it since so many ideas are already around which we can employ?

-- You can copy ideas from the rest of the world, which gives you a huge advantage for catching up without having to work through them all over again. But you still need a market system and well-educated citizens. In my view, education is an extremely important responsibility and opportunity for every government. Another very important role for a government is creating the infrastructure that allows people live and work together in a city. We develop new ideas and exploit new opportunities most effectively when we can interact with lots of people. Living in cities facilitates that interaction, so the government has to take the lead in creating the infrastructure since the market by itself won’t necessarily get you where you want to go. Mauritius should be aiming to have a world-class city with a world-class environment where people would want to live. Most people do not necessarily want to live in resorts, on the beach; they want a place where they can live and work and be productive, a place where bright young people want to live and discover new ideas. If you don’t do that, your brightest university graduates will move off to some place elsewhere. And bright graduates from other universities won’t want to move in here.

* When you talk about the need for improving education for sustainable economic growth, what kind of tangible, measurable quality improvements can one consider as being on the right track?

-- Many governments try and measure the inputs that go into their education system like the number of teachers on their staff list, the number of students enrolled, but that’s not what you should measure. What should be measured are the outputs. Part of the goal of the government should be not just to spend more resources but also to get more productivity, more learning for the resources that you’ve got. OECD tests, for example, allow one to see how high school students in Europe compare with those in China, India, the USA in (subjects like) Science, Maths, etc. Mauritius should be using such tests to see how well its student population is doing compared to other countries’. You should have tests to measure what fraction of the population can read your newspapers. You are a successful enough country where the ambition should be such that every citizen should be literate at the level where they can read the newspapers. You should measure to ascertain whether you are achieving that objective. If not, you should figure out how to change the educational system to reach that goal.
A country like China has done a good job with literacy all across the population. India has not done as well as China on basic literacy, and it would be interesting to find out whether Mauritius is closer to India or China or even behind India, and then do the needful.

* In relative terms, to which country should we be benchmarking ourselves?

-- In education, I think you should be benchmarking yourself to the leaders: Singapore, China, Sweden, etc., because that’s the standard you should be aiming for. If you set lower goals for yourself, then that’s all you’ll achieve. The goal should be to have your high school students as well educated as those from Singapore or Sweden. Everybody should get to that level, not just a few.

* Are you suggesting that we should try to bring our educational level to that of Stanford, Oxford, etc?

-- There are different stages in this. First, everyone should complete a secondary education, and everyone coming out of secondary education should have good command of literacy, numeracy and science. Then, a large fraction of those students from secondary education should go on to some form of tertiary education, whether it’s a university, a polytechnic, or a school that trains students in computer programming. The point is that a large fraction of your students should be going beyond high school. In the USA, Canada, almost half of the students go beyond high school to the tertiary level. When you look to the future, that’s where you should be aiming as well. People here often say that education is free, but that does not tell you what you want to know: it could be free, but there could be positions for only 10 students, and the rest of the students cannot get education beyond high school.

* Are you then saying that finally it is the output that shows whether you are on the right track or not?

-- Yes, it’s actually the output both in terms of the number of people and the quality of what they learn. Whether or not the system is free is just not the thing to look at.

* Our education system has been identified as elitist and it has been said that it suffers from low internal efficiency. After so many attempts, we have failed to reform the system effectively. What would you consider to be the right way forward?

-- The first step is to measure output. If you can’t measure the output, you have no idea of measuring how well the system is working. If you were to test students in secondary schools, say those between 12 and 15, and the results show that only a few students perform extremely well and the rest rather poorly, that will show you do have an elitist system. In the same vein, if your average student isn’t performing as well as Chinese students in spite of the fact that you are spending more, you then need to improve efficiency in terms of having more learning for each rupee that you spend on the system. The very first step of reform is to measure how you are doing, the next one is then to set ambitious goals for yourselves, partly by benchmarking against other countries.

Measuring what you are doing is extremely important, otherwise there is no way to manage any human activity if you can’t measure whether you are succeeding or not. I also believe it’s good to have what I would call low stakes measurement, that is, testing all along the way how students are doing. The other thing is competition -- letting different organisations try to do a better job and rewarding those that are really doing a better job. That means you have to measure who is doing better and then you reward the students, the teachers and the schools that are doing better. Rewarding success is a very important general strategy.

* We are now implementing a new development strategy centred on global competitiveness to return to higher growth paths and full employment.  What in your opinion will be key policies or strategies that will see us through this crucial transition period?

-- Again, it’s a better educational system. The best hope that you as a nation can hold out to people who are disadvantaged is to say: ‘We’ll make sure that your children can get a better education than you have had and that they have a chance for a high-skilled job, not a low-skilled job. And for those of you who are currently disadvantaged and beyond education age, we’ll offer on the job training and other such schemes.’ Education training is the best way for the government to increase the total economic output of the nation but also to make sure that people who are disadvantaged do not get left behind.

* Mauritius is also aiming to develop into a major service provider in the region and beyond and move gradually up the value chain for most of its exports. Given that it is constrained by its low-skilled labour force, Mauritius has opened up its economy still further to be able to attract external technical expertise.  Is such a strategy devoid of pitfalls?

-- I think the very high-skilled workers you can bring in will be very beneficial to the country, and you should attract as many as possible. The more you have high-skilled workers, the more your domestic high skilled workers will benefit. Think about New York City, Hong Kong, Singapore. Why do so many people go there? It is to be around other people who are highly skilled. High skilled people benefit from being around many other high skilled people, and low-skilled people, whether they are construction workers or labourers, benefit when there is a more vibrant economy fostered by the high skilled people. In other words, there will be no risk to any one if you manage to get more high skilled workers from other countries to join your workforce, only benefits.

* According to economists, Mauritius has resumed a 5-6% growth trajectory, on the strength of EPZ (boosted by rupee depreciation) and tourism, FDI and the Integrated Resorts Schemes. The high cost imposed by inflation has however become socially untenable. Would you concur with those economists who are now asserting that making haste slowly is generally a better approach than shock therapy?  

-- In general, the benefits from reform are so large that the sooner you can undertake the reforms the quicker you can get those benefits. There are some things that the government cannot control, like the price of oil right now. Prices have gone up, and so has inflation in Singapore, in the USA, in Mauritius. No government, not even the US government can control the price of oil. That does not mean that you want to avoid doing other things that will be very beneficial to the economy. Reform is much like going to the dentist: you do not choose not to go to the dentist because the price of oil has gone up; you do go even if it’s going to be painful because you’ll be much better off the sooner you get that toothache sorted out.

* Some countries like Germany and Sweden actually consolidated institutions of conflict management with regard to labour. The institutions operating over here in this respect are now being called into question as they are said to no longer satisfy the need for flexibility. If so, will the absence of consensus-building -- among workers, private sector and government -- take a toll on our economic reforms?

-- I am not conversant with the politics here, but there are measures the government can take to help the people who are disadvantaged, which can help maintain this sense of solidarity, this sense that everybody will benefit from reform. The people who suffer from disadvantage right now are to a large extent those who did not get a good education. I think that new training and job opportunities combined with reforms that make your market system work, is the way to improve the lot of everybody.

* The Economic Partnership Agreement that is being implemented by the EU with former ACP countries is being questioned by many developing countries. Almost all rich countries got wealthy in the first place by protecting infant industries and limiting foreign investment. But these countries are now denying poor ones the same chances. For developing countries to develop through trade, shouldn’t the rich countries accept some degree of asymmetric protectionism such as tariff protection, subsidies, etc., towards less well-off countries?

-- The evidence on this suggests that protectionism is a very bad strategy for growth. Your economy was very protective before you first opened up, and you were not developing at all. Your experience shows so clearly that openness and removing subsidies and embracing the market have led to faster growth. The people who say that protection is the way to get faster growth are just wrong. That’s not what the facts show.

* The liberal model of economic development is being questioned these days in that it has its weaknesses in delivering inclusive growth. The emergence of India and China shows that there could be other models of growth that can deliver growth with equity. What are your views on this question?

-- If by liberal, you mean no role for the government, that may be true. But the right model is one which embraces the market, opens up to the rest of the world but which still has the government do the kind of things that help everyone benefit, like investing in education and in training, providing opportunities to people who otherwise would have been left behind. So the best way to get a successful growth that is inclusive is to embrace the market, open up to the opportunities from the rest of the world, but at the same time put in place special programmes that help people who would otherwise be left behind.

* During the few days that you have been here, what’s your feel of the situation? How are we doing?

-- My feeling is that you are too cautious. I think the potential for the economy to grow and for everyone to benefit from that growth is very large. There is a fear and caution that are holding you back whereas a willingness to invest and exploit the opportunities would serve you very well. China was closed, protected and afraid of the market. It has now said: ‘We will embrace the market and exploit the opportunities that it gives us. And our standard of living will go up very quickly.’ There is no reason why Mauritius should not be able to do what China is doing. Not in low-skilled manufacturing, but in higher skilled sectors where you can benefit from exporting to the rest of the world. So, again, education is absolutely essential for making this work. If you can raise your educational levels to make people participate in those higher skilled exports, then you can get huge advantages from interacting with the rest of the world. I live in Denver, which is in Colorado, USA. If we had said that we need to protect our industries, or we do not want to trade with Chicago, San Francisco and Phoenix, that would have been extremely harmful for people living in Denver. What we did instead was we said: ‘We need the University of Colorado, we need the schools to train our people so they can compete with firms from other places.’ That kind of openness to a huge economy where we are trading with all others in the other American cities benefited us enormously. You will be doing yourself so much harm if you try to cut yourself off from the rest of the world, or if you apply new subsidies to distort the market…

* But you still have to protect the poor, don’t you?

-- Yes, but you can protect and help the poor through other measures, like job training, education for their children. Help them participate in the economy rather that being left outside the economy. Bring them in, so that when the economy takes off they can come along with it. Subsidies, protection, trade barriers are terrible ways to help the poor.

“The right model is one which embraces the market, opens up to the rest of the world but which still has the government do the kind of things that help everyone benefit, like investing in education and in training, providing opportunities to people who otherwise would have been left behind. So the best way to get a successful growth that is inclusive is to embrace the market, open up to the opportunities from the rest of the world, but at the same time put in place special programmes that help people who would otherwise be left behind…”

“Prices have gone up, and so has inflation in Singapore, in the USA, in Mauritius. No government, not even the US government can control the price of oil. That does not mean that you want to avoid doing other things that will be very beneficial to the economy. Reform is much like going to the dentist: you do not choose not to go to the dentist because the price of oil has gone up; you do go even if it’s going to be painful because you’ll be much better off the sooner you get that toothache sorted out…”

“The evidence on this suggests that protectionism is a very bad strategy for growth. Your economy was very protective before you first opened up, and you were not developing at all. Your experience shows so clearly that openness and removing subsidies and embracing the market have led to faster growth. The people who say that protection is the way to get faster growth are just wrong. That’s not what the facts show…”

“The best hope that you as a nation can hold out to people who are disadvantaged is to say: ‘We’ll make sure that your children can get a better education than you have had and that they have a chance for a high-skilled job, not a low-skilled job. And for those of you who are currently disadvantaged and beyond education age, we’ll offer on the job training and other such schemes.’ Education training is the best way for the government to increase the total economic output of the nation…”

“Measuring what you are doing is extremely important, otherwise there is no way to manage any human activity if you can’t measure whether you are succeeding or not. I also believe it’s good to have what I would call low stakes measurement, that is, testing all along the way how students are doing. The other thing is competition -- letting different organisations try to do a better job and rewarding those that are really doing a better job…”

“The more you have high-skilled workers, the more your domestic high skilled workers will benefit. Think about New York City, Hong Kong, Singapore. Why do so many people go there? It is to be around other people who are highly skilled. High skilled people benefit from being around many other high skilled people, and low-skilled people, whether they are construction workers or labourers, benefit when there is a more vibrant economy fostered by the high skilled people…”

“China was closed, protected and afraid of the market. It has now said: ‘We will embrace the market and exploit the opportunities that it gives us. And our standard of living will go up very quickly.’ There is no reason why Mauritius should not be able to do what China is doing. Not in low-skilled manufacturing, but in higher skilled sectors where you can benefit from exporting to the rest of the world. So, again, education is absolutely essential for making this work…”