- Speaker #0
You are listening to Debt Talks, the podcast of Sian Spoole Chair in Sovereign Debt and Finance. We're going to be discussing the economics and politics of debt, exploring past and current episodes of debt distress, examining legal controversies, and much more. Join us for the latest insights and stay tuned on Debt Talks. Hello, I'm Paola Subac, I'm here in Sciences Po. Today with me is Thomas Melogno, Chief Economist at AFD or Agence Française de Développement. Welcome, Thomas.
- Speaker #1
Hello, thank you, Paola, for having me.
- Speaker #0
Let's begin our conversation and to focus on a simple but sobering fact, which is that, and we know this, this is a fact everybody's talking about, and it's progress. towards achieving the 2030 Sustainable Development Goals, so the United Nations Sustainable Development Goals, has fallen behind expectations. So now we are mid of the way, and we know that these are numbers from the United Nations, that only 17% of the Sustainable Development Goals are on track. 17%, one seven. Nearly half, so 48%, are facing serious delays and more than a third are either stagnating or even regressing compared to their 2015 baselines. So this really is a sober picture. Obviously, we know that in the pandemic, climate-related disasters, wars, the rising geopolitical tensions all have... clearly made things worse. So that's where we are. But still, the overall situation remains dire. So my key question to you, and maybe this is a good way to start or a sober way to start our conversation, what can be done?
- Speaker #1
Well, it was clear very early after the SDGs that some of the targets were probably too ambitious, even before COVID and before the invasion of Ukraine. There was a high level panel at the UN in 2019, which identify a number of targets which probably had been sent too high, in particular for developing countries, so that they were almost impossible to reach. But apart from that, let's say, statistical problem, it's true that after COVID and the war in Ukraine, the SDGs have become even more difficult to reach. So now there are many reasons for that. Some, as we said, were related to what happened in the world in the meantime, but also the fact that we need to Probably we think how development finance can play a role to actually reach the SDGs.
- Speaker #0
OK, can I stop you here a moment? Because I'm puzzled, you know. I'm an economist, you're an economist. We deal with numbers. We deal with facts and evidence, hopefully. And again, I'm surprised, I think, the level of ambition. So again, I'm basically overshooting these targets because they are too ambitious. and what about try to make targets that are achievable without being obviously not ambitious at all but you know they are achievable knowing what we are doing and obviously leaving space for the unknown for shocks the unexpected shocks well i think part of the answer lies in the fact that targets
- Speaker #1
were not necessarily differentiated enough from the start so you cannot have the same targets in developing developed countries and even in amongst developing countries, which is a way too wide category. I think we should probably set targets based on an honest assessment of the starting point. That's the first methodological remark. That's the first methodological remark.
- Speaker #0
That's to start with. So starting with a good assessment rather than...
- Speaker #1
That one. Then I think probably one of the main advantages and I think progress of the SDGs compared to, for example, to the Millennium Development Goals, which were very... important in particular for development agencies before 2015, was that they tried to bring in coherence between social, economic and environmental objectives. Whereas in the past, there were separate agendas for the environment, social objectives, or financial and growth objectives.
- Speaker #0
And this is very important because we can separate economic growth and development from social and human development. So they have to be part of it. and obviously environmental development. They have to be part of the same parcel.
- Speaker #1
I think it was a huge move forward, the SDGs, because they managed to regroup all the various agendas of the United Nations. So I think that's to stay, and we absolutely have to keep that, even though probably some of the targets will not be met and they will have to be discussed at some point between now and 2030. But still, we should keep most of the framework. I think that's quite important. The second thing is that probably the tensions between some of the SDGs were underestimated at the start. We knew that we have to make progress on the environmental front, as well on the social front, economic front. But I think the tensions between the various objectives were a bit underestimated.
- Speaker #0
And so the tensions you mean, what we say the trade-offs between... Is that what you mean by tensions?
- Speaker #1
The scientific trade-offs, they are clear. Typically, most scientists will tell you that putting a price on carbon will help reduce carbon emissions. But at the same time, it's going to create social issues. We've seen that in France with the yellow vest, but we've seen that in many countries. So there are scientific trade-offs, and there are also some social trade-offs or political trade-offs for which political solutions need to be imagined. And sometimes transition needs to be set in place so that you can manage separate objectives, but that you want to keep in coherence. Probably most of the work that researchers need to do right now is precisely about designing transitions to make it possible to actually lead transitions that lead to reaching most of the SDGs. I think it was underestimated and there was too much evidence.
- Speaker #0
to interrupt you, but it is extremely important, partly because in our series, in our... that talk series, we had some other guests with whom we discussed, again, the trade-offs between development and the various areas of development. Exactly this, you know, what do you mean to carbon, putting a tax on carbon emissions and what you mean in terms of social impact and particularly on the low-income people and so on. And so it's very interesting because basically we need to design a framework that brings everything together, otherwise you have a fragmented policy framework. Or in other words, you talk about economic development without thinking in terms of climate and so on. But at the same time, you are faced with this type of trade-offs and it is really difficult to find a way to reconcile these trade-offs. Correct?
- Speaker #1
Yeah, that's absolutely correct. And I think 100% of governments worldwide are actually looking for solutions to reconcile social objectives and environmental objectives together with their public finance or debt. This is... really what they have on their plate. And a lot of the work we do at EFD in terms of research is precisely about helping governments design their own trajectory towards sustainability. Sometimes they, most of the country, I think, agree on the destination, but the way to reach actually that point of destination is very difficult. What you do in the short term over the next five years, 10 years, 15 years, to actually maintain the number of jobs in your economy, but to reduce your carbon emissions, protect biodiversity. and at the same time maintain your financial stability. This is the sort of questions that governments have to face. And the answers are not trivial. So they really need to build models or plans to actually implement their transition, which can be attractive politically speaking over the long term, but sometimes it's more difficult to manage in the short or medium term.
- Speaker #0
Exactly. And you provide the maps for doing this transition. This is absolutely very true and very, very important. important. So again, how we go, I mean, the destination might be clear. We might know where we want to go and we want to achieve, but how we go there is very difficult and because of all these different trade-offs and something that now we are experiencing in the current debate, you know, the short term, there are costs for, for example, for environmental sustainability for climate mitigation and climate. adaptation. And many countries are reluctant now, many governments are reluctant to take up those costs, at least in the short term, because people feel aggravated, right?
- Speaker #1
Yeah. And sometimes, I mean, we can be mistaken here. Some people believe that it requires more imagination to design the destination point. rather than the way forward. But since we are at Sciences Po here, I think actually imagining the political equation to manage a transition is actually very difficult and requires a lot of creativity. So let's not assume that what lies in the very distant future is more uncertain than the present. Sometimes it's the other way around.
- Speaker #0
Okay, let's explore now these transitions. And so back to the question, what can be done? So now we've got this very ambitious... issues. but very important sustainable development goal. We are half the way. We know then it will be difficult to achieve them. What can be done?
- Speaker #1
So first, well, I'm coming from a financial institution, so you have to look at the financial gap. It's been estimated between three, four trillion. three to four thousand billion dollars or euros, it's almost the same. So it's a huge sum. And I'd say there are two sort of gaps. One in the low-income countries is really a pure financial gap where more money needs to be put on the table to actually accelerate the development of these countries. A good share will actually come from themselves, from domestic savings, taxes that that could finance public policies. private savings, earmarked towards private investment. So first, even in low-income countries, most of the money or the investment needed will come from themselves.
- Speaker #0
But still,
- Speaker #1
there's room for international action there, in particular for the poorest countries.
- Speaker #0
Can I, again, unpick this domestic mobilisation? I've been involved in a couple of projects recently on domestic mobilisation, mainly providing expertise on some policy on this. And, you know, as you said, we can mobilize domestic capital, we can have more efficient tax systems, we can use domestic savings. But the reality is that many low-income countries do not have much savings. They tend to have low savings. And so the scope for domestic mobilization of capital is very limited.
- Speaker #1
It's clear that many low-income countries are sort of trapped in a situation where taxes are too low, between 10 and 15% of GDP. And you cannot finance your education system, health system, public investment in general, on taxes if they represent only 15% of GDP. Just to give you an example, when 50% of your population is below 18, they should be in the education system, but it's going to require much more than 3 or 4% of GDP. So here, they're going to need to have to agree, and that's a complex domestic political equation, but to... to raise more taxes. That's really for the most important public services. Then you have savings that in many economic models are equal to investment. When the economy is closed, when the economy is open, you can borrow from elsewhere, but still, generally speaking, most of the time investment is close to savings. And again, as you rightly said, when you have investment, which is just 20, 25% of GDP, it's not enough to really Launch your growth and get out of poverty like typically the Asian tigers did. In their case, savings and investment were roughly 35, sometimes 40% of GDP. This is what you really need to get out of poverty quickly. And there are many countries in Latin America, in Africa, sometimes in some parts of Asia as well, where savings are too low and investment as a result is too low. Sometimes laws in economics are not really laws in the sense of physics, but I've never seen any country really develop without a high level of savings and investment, at least in the first stages of development.
- Speaker #0
Absolutely. And then again, you mentioned the Asian tigers, obviously the integration in the world economy through trade. And this is a good topic now, particularly now that we all talk about trade policies. I mean, for these countries, being integrated, being able to export or have access to external markets was very, very important. And that obviously developed, you know, loan to also investment, capital inflows, and sort of created a virtual circle of development and growth.
- Speaker #1
Yeah, openness has mattered in the case of Asia, for sure, but also having a very high level of savings and therefore investment. Also, most of them developed their education system. infrastructure. So most of the time they were also they opened their capital account to attract investment and next to investment actually it's not it was a bit about the money but mostly about attracting technology and know-how from foreign countries. So very clearly in early Japan at the end of 19th century but also in many Asian countries that attracted foreign direct investment. again it's Partly to limit the shortage in capital, but mostly, I would say, to attract technology and know-how to then boost their productivity and become advanced economies as they have in a number of cases.
- Speaker #0
Yeah. Again, that is it. So again, harnessing where it's possible domestic capital and but also getting international capital. So you mentioned foreign direct investment, which is should be the first. a most important channel for investment and development in low-income developing countries.
- Speaker #1
Well, FDI matters. Maybe I should also explain probably what development banks and international development banks can do, because in many instances they... They bring in capital but also know-how or technical and technological skills to boost investment. So in that case we still call that official development assistance but truly it's about development finance, it's about technical cooperation that are brought together by advanced economies or advanced countries towards developing economies. And in that case the volume of finance mobilized. from abroad will matter, but also the technical content and the sharing of know-how or knowledge between countries. I think it's a very important contribution that development banks can play. It's true for EFD, but also the World Bank or German counterpart, KfW or Japanese corporation for example, because typically when a country wants to invest in a metro system or in water and sanitation, it's not just about money. also about engineers, people who know how to run a water or electricity network, for example, and are able to provide advice on how to do it and also sharing their knowledge with their domestic counterparts.
- Speaker #0
Yeah. And in fact, we had a couple of episodes on development banks, on multilateral development banks, on national development banks. And there again, we really look into this type of mechanism where there isn't is not just Finance, but is again technical capacity, expertise, the support to project. And in some cases also grants, because grants are important, because again, there are countries that are very poor and for whom the grant is a way to start the process of development. And there is no way then even a concessional loan will be able to be, to sort of trigger this type of development.
- Speaker #1
Yeah, maybe just a word here because this is about debt talks. Just to explain that most international public development banks work against the basic market principle because we lend at higher rates to the best customers, meaning the most advanced developing economies. But in poorer countries, we do mostly grants or subsidized loans, meaning concessional loans at really low rates, which is not what the... typical commercial banks do because they tend to lend at lower rates to their richer customers. We do it the other way around, of course, because we have support from states and citizens.
- Speaker #0
Yes, exactly. And the complexity also the operation of the multilateral value bank, because as you said, they are supported by what we say taxpayer money. And so obviously there is is an obligation to... be careful but at the same time an obligation to use this money to help development. And so, as you said, not necessarily the best customers are those who can have the best, actually, that don't get the best conditions and the most favorable conditions.
- Speaker #1
Absolutely. Institutions like the World Bank, but also EFD or KfW, actually make more money in the richest developing countries. to make internal transfers towards the lowest income countries.
- Speaker #0
Yeah. And again, there is this transfer mechanism that is necessary in order to get capital to mobilise in developing countries. But let me, this is all very interesting. Again, we've been kept our conversation so far at a very high level. So the principle of everything would be, you know, if we had the magic wand to be able to get the world as we like it. But let's get into more details on practical and policy-oriented, you know, intervention and actions. And so I was actually, I read one of your recent papers where you discussed the opportunities offered by artificial intelligence. And I thought it was very interesting to really bring the artificial intelligence, which is now everybody talks about it, you know, AI is all over the place. But then again, in your paper, you asked the question, how? Developing countries, and particularly the low-income countries, could actually have access to the opportunities offered by AI, be also protected by the challenges that AI obviously poses, but at the same time being part of this big change in the world and not be left behind, because there is a big risk here that countries then cannot be part of this process. will basically become the gap with the more advanced economies will be even wider. And the paper was very interesting. We'd like to explore a bit more the question you explore in that paper.
- Speaker #1
Well, the initial question with my co-authors, Peter, Laure, Anastasia, was really about is there AI, is it only about the competition between China and the US? Maybe Europe partly in that conversation, but is the story over once we have said that this will be the major players? Or will there be a potential, whether in Africa, Latin America and the rest of Asia, to not only be customers of AI products, but also... participate in the production of AI products. And there's a variety of AI products, by the way. It's not just large language models. I think it's a more complex story. But the idea was really to ask ourselves, and we did not know the questions when we started this paper, and the conclusions were actually quite different from what I thought in the first place. But what we did was look at where the AI investment in the world takes place. Is it only in the US, in China or is it a little bit everywhere? and what are the factors that actually explain the current investment in AI. First it was to draw a map and in the paper you can see maps of where AI is actually growing but also asking ourselves what can governments do to increase their potential. Part of the answers I think really were straightforward and we were not surprised to see that you need infrastructure, broadband access to grow AI. I was a bit surprised to see the importance of of research, training of PhDs in AI, and the quality of data, including public data, by the way, to help grow an AI ecosystem, even sometimes in small countries. So, of course, there will be more AI companies in the US or in China, but relative to the economy, some countries, for example, Mauritius or Singapore, can do very well, despite their limited market size. So, there's still a place apart from... huge data centers, the training of very big models, but you can still develop apps, you can still develop applications, you can still implement AI within your companies, you can develop really context-specific, time-specific use cases for AI even in relatively small or poor economies. And I think that was somewhat of a surprise, but it leads to conclusion on where exactly a government should invest. to make it possible because it doesn't happen everywhere. It's in a limited number of countries, but it's possible.
- Speaker #0
Yeah, it is a bit counterintuitive because what you expect is obviously investment in AI in countries that have the capacity to invest. So obviously in the United States, because we have a huge industry around innovation and technology, and we have an infrastructure, a financial infrastructure that allows this investment. Obviously, China is another case, obviously, with different sort of features of this financial infrastructure, but is another case and there is, again, a very strong industrial policy then. But then again, it's a bit different in Europe. But then you think about the really small and less, small developing countries and you Why do they have a cluster that will allow them to have these types of companies or you see them, you know, obviously say what you expect and probably that's what you expected before this research you did is like, well, they can be consumer of AI products, but not innovators on this. But obviously your research proved then that is possible.
- Speaker #1
Well, just two years ago or even one year ago, the major AI companies were saying that because you huge data centers, a huge amount of data, plus very important and large models to develop an LLM. For example, it would require 10 to 15 billion to train an LLM. Then we have seen some open source models from China, but also from other countries. That's right. Making it available. And even the code of these models have become available. So we could have imagined a very closed system. typically similar to operating systems into these computers, really with a limited competition in a very big economies. And now even models seem to be more accessible and even they are content for other countries. That's one thing. Of course, we know now the part of the job will be to implement AI within companies, within governments, within NGOs, wherever. That's not, I think, not really the problem, but implementation of models on... Data within institutions will matter probably more. And the capacity to code will be accessible even in relatively low-income countries, as long as they have developed human capacities to do it. If you don't have the talent in your country, it's not going to happen. But you can do it with a limited number of persons, if you have in your higher education system particular trainings. We have seen, for example, the number of articles published related to AI in scientific reviews having a strong connection with actual investment. And it's not always the case. Sometimes you have research in a country and no particular company. But in the case of AI, we've seen really a stronger connection between the investment in the field and the existing, typically, universities, training, master's, PhD curricula in the country.
- Speaker #0
So basically you say then investment in AI drives... research. So, you know, investment in human capital,
- Speaker #1
in the governance of data,
- Speaker #0
production of data,
- Speaker #1
is strongly associated with investment in AI and the emergence of AI companies.
- Speaker #0
Right, right. And so basically, the thing is, we could have countries, you know, developing countries can have their own AI companies, but we need to have to ensure then the human capital is there. So in other words, you got the skills that are necessary for developing these companies.
- Speaker #1
And it's a message for universities, but also for development agencies like EFD or the World Bank or others. And recently, actually, the World Bank, for example, has created a vice presidency for digital economy, which probably is going to involve investing in creating capacities, including human capacities.
- Speaker #0
Human capacity is a case. But again, this is why is I wouldn't say long-term proposition, but certainly it's a medium-term proposition because you need to create the right skills. You need to have the training courses, the university programs, whatever in place to train the right people. So it's not something that will deliver an outcome tomorrow. It will take a while.
- Speaker #1
Absolutely. And one of the reasons why... we might need or countries might need their capacities that AI models trained in English, for example, in the US context or in Chinese, in the Chinese context, will not necessarily be relevant in Senegal, in Morocco, in South Africa. Recently, we had an experience and a program with the Bibliothèque Sans Frontières, Libraries Without Borders, to develop educational content in a number of Senegalese languages, Poulard, the language for the poll community, probably tomorrow in Wolof, with official content for their country, but in national languages, which did not exist. And I think it's very important that many countries can enjoy the benefits of AI. There are risks associated with AI as well, but it must be really adapted to their context.
- Speaker #0
Yeah, because this again is very interesting and again is a way to say there's no point to just put You know, financial capital in a country and in certain investment, if we don't have the right skills, the right human capital. So the two need to be together. So it would be a waste to some extent if we don't have the right skills. So we need to prepare the ground before the investment can really take place.
- Speaker #1
Yeah, absolutely. I mean, it goes all together, the governance of a particular sector. Infrastructure and human capital. Sometimes in development, I mean, it's a world where there are fashions. So at some point, microcredit was supposed to save the world. Then it's all about human capital, then it's all infrastructure. But truly, no country has developed without a combination of the various basic but essential elements of an advanced economy.
- Speaker #0
Yeah. And again, developing human capital, as we know, because sometimes the countries they need to decide how they allocate their... scarce financial resources and sometimes they need to, they have other priorities. So again, this is an area of intervention for development banks, like developing skills and education or very specific skills and education.
- Speaker #1
Absolutely. I mean, again, because this is a Deb Talks, we must actually interrogate development banks like AFD. on the return of their investment. Similarly for government. When you invest based on the loans, you will have to pay an interest rate. So if a project or public policy doesn't have a social return, you should not borrow to finance it. Otherwise, you're going to go bankrupt. And it's true at the project level, at the policy level, or at the government level. Currently, while we are talking, there are a number of countries which have too much debt. And because the interest rates are pretty high in the US, still somewhat in the in Europe, but it's very true in Africa or Latin America as well. We need to invest in fields where there are high returns. Otherwise, it's going to snowball. I mean, debt is going to snowball. And we are going to face another debt crisis if we are not careful enough to actually measure the return expected on any investment. I think it's very important. Yeah.
- Speaker #0
So let's, this is very, very important, but let's unpack a bit this because we talk about social return. And again, something we discussed in another episode of Tech Talks is exactly this, that social returns or that are not, let's say, quantifiable in terms of profit, financial returns. So there are areas where the private sector doesn't take the risk or is not interested in investing because, you know, social returns are not something that investors, traditional investors care about. they have other goals and other objectives. So again, there is a space here for social return for multilateral development banks, for agents that are prepared to take the risk and let the economy or even a bunch of firms to develop. Right?
- Speaker #1
Yeah, absolutely. And as you were saying, when you invest in a project or a public policy, returns can be um I mean, it can be hard to disentangle between returns for the government, for the government, sorry, for the company, if it's a public company, for the individuals. But if you want to look at financial sustainability, the borrower has to get some of the returns, otherwise he will not be able to pay the loan. And if you're taking international loans, it should be mostly in a sector typically that generates revenues in foreign currencies, otherwise you might have a mismatch there. But But again, I think the main point is that we should really look in details on the returns of any investment, whether it's for the government, whether it's for individuals. But if a project doesn't have sufficient returns, we should not finance it through loans. In many instances, there are public policies that have immediate interest and can be financed through taxes. But if you... If a particular country or company wants to borrow from abroad, then it's a different story. Which is why a bit earlier I was talking about the various sources of financing for public service. But my concern is that too often we rely on international debt for public policies that should be financed through domestic taxes. And truly international borrowing should be targeted towards sectors that have explicit return and can generate foreign currencies. otherwise you create mismatch and a risk of insolvency. Absolutely.
- Speaker #0
And so, again, it's like there is an instrument for every need. And so it's very important to understand what type of instrument we need for each need. And so, for example, one thing we say here at the Sciences Po is it's very important to look at that, the moment that is incurred, not... When debt becomes unsustainable, and so asking the question, you know, is this debt sustainable? So again, if you like crisis preventions versus crisis resolution, so an intervention when the debt is now basically difficult to manage and they need to be restructuring, they need some solution. It's just what are the good conditions and when money should be borrowed. under which conditions and then when other instruments should be considered. And exactly this, exactly to avoid...
- Speaker #1
Absolutely. Maybe to come back to the 80s or 90s at the time, and even the early 2000s, there were a number of debt crises. Mexico, in Asia in the late 90s, in Africa mostly after 2000. And it has led to setting up debt sustainability... debt sustainability analysis, the DSA for low income countries, which is done by the IMF and the World Bank. We do it also internally at EFD. So we are our own rating agency, you know, rating agency between AAA, AA, AAA, BBB and so on. Because when you land over the long terms, 20, 30, sometimes 40 years, it's development banks do a different job from traditional capital markets. They land over the very long term. So it's really the long term sustainability. Yeah. financial sustainability of developing countries that matter because we need to be repaid. We don't have any subsidy to run either the World Bank or EFD. So we have to assess the long-term sustainability or the development path of a particular country. And this is why I think we should pay attention to returns to avoid, again, getting into a debt crisis. We have seen a number, and you were alluding to it, a number of countries going to the Paris Club because their debt needs restructuring but preventing this risk hugely matters. I think we are in a slightly better position now than we were in the 90s, but still, probably we should do a bit better.
- Speaker #0
Yeah, I think I agree that we're in a better position. Possibly, I think that the years of very basic zero, what we used to say, zero-bound monetary policies of the United States, the Fed monetary policy, policy was basically zero interest rate. So that means there was a search for yields. And so many developing countries were considered interesting investment simply because they interest rate on their debt was higher. But that was again, and that created some problems later on. So there was too much money searching for yield at the time without thinking whether or not that. that was sustainable.
- Speaker #1
Yeah, I mean, even five years ago, interest rates in the US or Europe, even at the 10-year horizon, between 0%, 1%, sometimes 2%. And in developing countries, over the same maturity, you had rates at 4% to 5%. Now it's between 4% and 5% in the US, but it's mostly between 8% and 10% in Africa, for example. In Latin America, of course, it depends on the country, but let's say 7% to 8%. So we've seen interest rates rise massively. And now we have a few investors still having an appetite for debt in Africa or Latin America, but certainly not at the same interest rates. And because the stock of debt is higher, it means the debt service has grown much higher now in Africa, Latin America, and some Asian countries as well. And it's a different, this is when we are going to measure whether or not countries have been sufficiently cautious and will be able to not default. Again, I think we'll be in a different position from that of the 90s or early 2000s. But still, we've seen already five or six countries having to go to the Paris Club for debt restructuring. And there might be other cases. My best guess is that it's not going to be massive. But still, because interest rates are higher, the countries that are the most at risk will probably need restructuring.
- Speaker #0
Yeah. And it's not only a restructuring. And what concerns me is... There is another group of countries, they manage to somehow service their debt. So, in other words, not to be in the default or semi-default situation, but they are managing their debt at the expense of other priorities and other spending. So they spend, they cast spending on education, on health care, on social. policies and in order to sort of preserve funding for servicing that debt. And that is equally worrying because, you know, it's terrible to be in a debt restructuring situation because the default or debt restructuring is an uncertainty, it's painful and anything. But possibly it's even worse to be in a situation where you constantly try to... meet their obligations, but cutting social spending and education, anything else?
- Speaker #1
Absolutely. I think the vast majority of developing countries is not going to default. However, the World Bank is talking a lot about the middle income trap, whereby many countries will not default, but will have to cut their expenses or their investment. And therefore, it's going to impact their growth and their ability to get out of that middle income trap and become advanced economists. There are not that many countries. that become advanced economies. Recently, I had a discussion with the chief economist for Europe and Central Asia of the World Bank, and he was reminding us that half of the countries that got out of this middle income trap were actually European countries. And it's really the perspective of coming into the EU that has led to huge and sometimes painful reforms even before they even got into the EU. And that's roughly half of the countries that uh later became advanced economy. Then there are other examples in the rest of the world, but not that many. So being trapped in that, in particular, financial difficulties is sort of a common pattern, while being able to get out of this trap and really have a sustained growth over the long time and maintain the capacity to invest has been rather the exception than the rule.
- Speaker #0
Yeah, absolutely. And in fact, on your capacity to invest, One area I'd like to explore with you is that you and your team have developed this AI, back to artificial intelligence, Investment Potential Index. Basically, it's a tool designed to help development finance institutions, banks and governments make informed decisions about AI investments, right? But also to identify countries with substantial untapped investment potential. So this is really very interesting, but could you walk our listeners through what these tools entail and how it works?
- Speaker #1
So the job we've done initially was to analyze the factors explaining AI investment. Now we've built an AI visualization platform. So you can go and typically if you're a minister of finance or minister of planning in any country, to compare your country to other countries and see if they are... particular fields where a country is weaker and probably could invest to expand the AI potential. Some countries might have infrastructure but not realize that their human capital for AI is too low, or it might be the other way around. So the idea is really to share the variables that lead ultimately to the AI potential and the realization of AI, to give advice or probably to analyze and compare between countries to see where they position themselves. and where they could invest to increase actual AI investment. Because some of them have invested in all the explaining factors and they're already doing very well. Some might be somewhere in the middle of the way, and probably many countries are in the middle of the way, that includes Europe and many other continents. And so it can be a sort of decision-making assistant to help design an AI strategy. That's one example.
- Speaker #0
It's very, very important. Again, you talk about AI strategy. It could be another strategy, about it. To me, the message here is to have a tool that helps assess the investment and the potential. So again, it's a way to make capital more effective, which is basically one of the recommendations of the severe finance for development conference, which is, again, let's use the capital we got, given that we have now... competition for capital because there are so many problems, so many challenges. Let's use it in an efficient way. Let's not replicate effort, duplicate effort, reinvent the wheel, but let's stay very focused.
- Speaker #1
Yeah. Earlier on, you were alluding to the importance of openness in the development of Asian economies, for example, openness to trade. But I'd say that openness to ideas, good development concept, innovation. Also UGD matters. And in that case, indexes or international studies can help countries to compare themselves with others. And it's not a north versus south situation there. France has to look very precisely at why other countries are doing better in their PISA score for education. But in some countries, they might compare themselves on their innovation ecosystem and AI ecosystem. Others might look at the US as a relatively poor life expectancy. Probably they should look abroad. and see why other countries are doing better. So again, I don't like to sort of describe the world and oppose developed countries and developing countries. I think it's more complex than that. And in today's world, being able to compare a country with its, well, basically with all the other countries in the world, probably it's more relevant in certain groups. But still, I think it usually matters because how ideas, good policies circulate in the world. is a very important factor of development. Earlier, Daron H. Emoglu had a Nobel Prize for stating the importance of institutions. And I think Both it's true, but we need to go a bit more into the details, which institutions provide good results. And I think comparing countries between themselves is always a very important intellectual exercise.
- Speaker #0
Absolutely. And I think this is really is a good closing point for our conversation today. But generally in the current, let's call it climate, where now we feel the fragmentation, We feel the competition and the conflict and the tensions around three. policies. The idea that countries can learn from each other. And again, I really like your suggestion and it should be the divide, the sort of mechanical divide between developer developing because there are actually indicators that says and even very rich country like the United States have life expectancy indicators that are not particularly good. And so they might learn from somebody else. from other countries. So again, it's sharing practice, good practice, sharing policies, and comparing notes. And so which basically bring again, everything under the umbrella of policy cooperation. That's what we need. And that's what multilateral development banks are for.
- Speaker #1
Yeah, absolutely. So you are talking about isolationism as a way to think about trade. It's not producing very good results. But anyway, and personally, I'm pretty much against intellectually isolationism. I think we should really look at good ideas that others have and not start from the fact that our country is the best in each and every public policy. I think it's really a wrong way to start your day. So spending a bit of time looking at how the other countries or companies are doing is certainly a good way to develop yourself. If I were to talk to a government, I would say compare yourself and try to find good ideas elsewhere.
- Speaker #0
Absolutely. It's a perfect time to really perfect way to close our conversation. Thank you very much, Thomas, for being with us today. And we shall continue.
- Speaker #1
Thank you so much, Paula.
- Speaker #0
Thank you.
