Asia catches up with the West – Romer
2018 Nobel laureate for economic sciences underscores importance of innovation in post-Covid era
19 Jan 2021 | Daniel Yu
Paul Romer
Paul Romer

“When historians look back at 2020, it will of course be a year of crisis and deaths, but it will also be the year when Asia no longer was in the mode of simply catching up with the West, catching up with the United States,” declares Paul Romer, co-recipient of the Nobel Memorial Prize in Economic Sciences in 2018, at the Asian Financial Forum in Hong Kong. “2020 was the year in which Asia significantly outperformed Europe and the United States.”

At the same time, he also points out that it will be the beginning of a harder era. “During the catching-up phase, it is easy to give lip service [that] innovation is good,” he continues. “But you don’t really have to discover that much that’s new if you are catching up. You can copy what’s already known. And this is what makes it possible for growth to go so quickly.”

Many countries fail to achieve that, Romer observes. “China deserves credit for doing a good job of remarkably catching up. But as it moves into this era of being at the lead, true innovation becomes even more important and harder.”

In the response to the pandemic, Romer praises Asia for its relative success. “Part of what we saw was more effective innovation and policy responses in Asia than in Europe or the United States,” he believes. “This particular virus turned out to be one which could not be controlled by the familiar methods of contact tracing and isolation of contacts because so much of the transmission of the virus was by people who are not already showing symptoms.”

He believes this more successful response in Asia underscores the importance of innovation in solving crises or challenges. “We needed to innovate [and] come up with new ways to control this pandemic. I was particularly struck by the decisions in China to use testing to completely wipe out the virus in Wuhan and Qingdao.”

China, and many countries in Asia, Romer continues, have been much more successful in coming up with ways to use testing without the traditional way of contact tracing aggressively to find the people who are infected and get them into isolation, and limit the spread of the virus.

Dangerous mindset

“The danger in the United States and in Europe was that people thought they already knew what to do,” he argues. “We’d just do what we've always done before. That is the mindset that kills innovation.”

The mindset for innovation has to be promoted, especially among experts, who in his view can too easily start to think they already know all the answers. “The mindset has to be one of experimentation, of trying, of humility that we may not know what’s right. We have to try many different things.”

Innovation is a responsibility not just in markets but in governments too. “We are into a very new era in many ways – very low inflation, very low interest rates, a recovery from the pandemic – many things that we don’t know with absolute certainty what’s the way forward.”

He endorses constant experimentation and trying new things. “If we select the things that work best, if we don’t hamstring ourselves by sticking strictly to things we have done before; and if we do all of these things in our personal lives, in our jobs, whether they be in firms, in the market, or in government – setting government policy, we can continue to make progress as all people on earth.”

Each nation can succeed or do poorly on a number of different dimensions, explains Romer. “China, for example, is still behind the United States in income per capita but catching up. What we do see is in this area of innovative and effective public policy response to protecting public health, that is an area where China and many nations in Asia are now leading and showing the rest of the world the way.”

Market bubbles

Looking forward, Romer notes that the world is in a new era. “What we learned is it’s valuable for the government to stimulate the economy [and] keep it running effectively; to keep employment up high. We can do that now without fear of exploding inflation of the kind we saw during the 1970s.”

The problem, he says, is that economies around the world have relied too much on monetary policy and cuts in interest rates as the way to provide stimulus. “This is dangerous. This could create bubbles; it could create instability in the financial markets.”

One of the most important areas for innovation in the coming five years to ten years, Romer reckons, will be for governments to find ways to stimulate effectively without relying on just monetary policy and interest rate cuts. “In some vague sense we know that that kind of stimulation can come from fiscal policy – tax cuts or spending.”

He says effective ways to spend, to stimulate the economy will be key. With the increasing levels of debt relative to GDP, Romer worries that cutting taxes could lead to a certain level instability down the road. “How do you use effective government spending to stimulate the economy? This is the big challenge for leaders in the coming decade.”