The Self-Driving Economy

Will we even need central bankers in a few more years?

Are central bankers the most overrated workers in the global economy? When Mark Carney, the governor of the Bank of Canada, was hired by the Bank of England this week, the financial media reacted as though the young Brazilian soccer star Neymar had signed for Barcelona -- a well-known prodigy had finally jumped to the big leagues. It's hard to believe the hype around central bankers, though, when a computer might do the job just as well.

There's no doubt that the job of a central banker is an important one. Countries have increasingly come to rely on monetary policy to smooth out the bumps in their economic cycles. Central banks are usually charged with controlling inflation by expanding and contracting the money supply, and sometimes with protecting their countries from adverse exchange rates.

A few central banks, like the U.S. Federal Reserve, are also supposed to support employment through economic growth, an addition that makes the job more complicated both logistically and politically. Some others, like the Reserve Bank of India, are not even independent of the other branches of government; political leaders can thus impose their will on central bankers, with the result that the bank's credibility -- its main asset when setting expectations about interest rates and the money supply -- can diminish to zero.

Yet for central banks whose main job is simply to control inflation independently of the rest of government, there's not much mystery. You could easily set up a computer to open the monetary taps when inflation was too low and start sucking money out of the economy when it was too high, in both cases stopping as inflation reached a preset target. And John Taylor, an economist and former Treasury official, even came up with a rule-of-thumb that fit the Fed's broader mandate to maintain full employment.

Alan Greenspan did his best to create a mystique around his post as chairman of the Fed with oblique pronouncements and regal surroundings, but his performance through the 1990s -- and indeed up until 2002 -- seemed to follow the "Taylor Rule" quite closely. After that, of course, he left the taps open far longer than a computer would have, blowing up the American credit and housing bubbles that would burst with devastating effect.

Greenspan may have been trying to bolster the reelection chances of George W. Bush, whose tax cuts he backed in an unusual intrusion into fiscal policy. Or he may have been trying to ensure that his final term ended during a boom, in an attempt to cement his legacy. Either way, a dispassionate computer might have done better for the American people.

What's less clear is whether a computer would have done better than central bankers during the global financial crisis. The deep downturn in economic activity required them to take creative and dramatic action to save the global economy from freefall. Unprecedented forms of monetary support like Ben Bernanke's "credit easing" and the return of Operation Twist could hardly have come from a computer programmed to buy and sell the same government securities over and over again.

A computer would also have fallen short at the European Central Bank, despite its narrow focus on inflation. Last year, the growth rates of the 17 economies in the eurozone ranged from -7 percent in Greece to +7 percent in Estonia, adjusted for inflation. How could you set a single monetary policy for all of these countries? It would be impossible for anyone, human or machine.

With these experiences in mind, the right way to think about monetary policy may be like driving a car on the highway. Today's cars can be driven manually or using cruise control. Under normal conditions, cruise control works just fine, maintaining a constant speed by adjusting the amount of fuel going to the engine. When the driving gets a little hairy, you want humans in charge. Their reactions may not be perfect, especially in retrospect, but the cruise control computer doesn't have the same analytical ability or range of available actions.

The driving has certainly become pretty hairy in the United Kingdom, and so it's understandable that the Bank of England would want to draft a foreigner widely seen as at the top of his field. To his credit, Carney is nothing like Greenspan -- his statements are sharp and transparent, using a combination of plain language and data to convey his conclusions. But the days of stardom for people like Carney may be numbered.

Put simply, the computers are catching up. Within a decade, self-driving cars will likely become commonplace on American highways. Just like central bankers, the cars will have to process a lot of information quickly and use a limited number of tools to choose a safe path forward despite constant uncertainty.

Of course, self-driving cars will have to perform as well or better than humans, even in the most difficult situations. Yet if a rule as simple as Taylor's would already have performed as well or better than Greenspan did throughout his entire tenure at the Fed, then surely a computer to replace Bernanke or Carney is within the capacity of current technology. The only questions left are who will program it, and who will be the first to give it a test drive?


Daniel Altman

Africa's Human Capital

In Sub-Saharan Africa, the best resources are the people.

Sub-Saharan Africa is booming. Average purchasing power in the region once denigrated as the heart of "the hopeless continent" has risen by a third in the past decade, and foreign investment is gushing in. Yet it's easy to miss the enormous differences between these 48 countries. Some, like the Democratic Republic of Congo, are still stuck with conflict and poor governance, but others -- even countries that investors have neglected, such as Burundi -- are laying the groundwork for the next stage of growth by investing in their people.

The problem with Sub-Saharan Africa begins with the term itself, whose meaning has become more than geographic. Increasingly, it signifies a region that does not include South Africa, considered a fairly developed, middle-income country where the average purchasing power is about the same as in Serbia or Peru. By that measure, however, Mauritius should be dropped as well. Some other groupings leave out oil-rich Nigeria, too, despite its continued struggles with poverty.

No single aggregate makes sense in such a diverse area. Yet most global corporations and government agencies inevitably slice and dice the world into regions, thus putting sub-Saharan countries in competition with each other for the attention of the world's big investors and policymakers. Lately, that competition has become especially stiff.

The leaders in the region are not always the obvious ones. There are, of course, some established darlings that are simple to spot. For the ease of doing business as measured by the World Bank, Rwanda, Botswana, and Ghana all look better than several countries in the European Union. Rwanda and Ghana also score highly for protection of property rights -- crucial for attracting foreign investors.

Look below the surface, though, and many other contenders are worthy of investors' attention. The progress in these countries is not so much about the business climate today, or even the level of security or quality of governance. It's more about the economic potential being built for tomorrow. This potential is best measured not by the experiences of corporate managers and consultants who respond to global surveys, but rather the development of human capacity in the next generation of workers and consumers.

In terms of human capacity, there are some striking trends for companies looking to get into sub-Saharan markets on the ground floor. For example, in overall human development as judged by the United Nations Development Program (UNDP), Madagascar now sits where the Republic of Korea did in 1980, on the cusp of its export boom. And a closer look at the data reveals many more examples of progress.

In the past three decades, the biggest improvement in education has come in Burundi. In 1980, children under seven there could expect an average of only 1.7 years of schooling, according to UNDP. Today, they will receive 11, and so the next generation of Burundian workers will be unrecognizable compared to the last. Uganda, Mali, Guinea-Bissau, Ethiopia, Guinea, and Burkina Faso have all made jumps of at least five years of expected schooling in the past three decades.

Health is another area where some countries have separated themselves from the pack. In Eritrea, Ethiopia, Guinea, and Niger, life expectancy at birth has risen by at least 15 years since 1980. Much of this change came from reductions in infant mortality. It is all the more impressive given that it came against the tide of the AIDS epidemic. For these countries, higher life expectancy will mean less hardship for families, lower fertility rates, and more investment of resources in each child.

Some of these countries, like Burundi and Eritrea, may be too small to capture investors' imaginations. But in East Africa, Uganda and Ethiopia offer more than 100 million potential consumers. And in the west, homegrown multinational corporations are already starting to span the mid-sized francophone countries.

As Korea showed starting half a century ago, vast natural resources are not a prerequisite for rapid growth. With better education and health come higher productivity, rising wages, and greater buying power. To plan for this growth, companies will need to use a long time horizon. One way to do it is by laddering the marketing of their products in parallel with increases in living standards.

An excellent example of this kind of long-term planning is Honda's investment in Vietnam. Honda established a subsidiary there in 1996, and within a few years its stripped-down Dream scooters were ubiquitous in city streets. As Vietnam prospered, the scooters got fancier. Eventually, they got doors, too. In 2006, Honda opened its first auto plant in Vietnam, producing the compact Civic for local consumption. Vietnamese consumers were used to relying on Honda products, but it took a decade for them to be ready for the big-ticket items.

Some investors may still be nervous about Sub-Saharan Africa, given its history of political instability and humanitarian disasters. But things can turn around quickly. Vietnam, a nominally communist country involved in military conflicts until the early 1990s, saw a huge surge in foreign direct investment once it made peace with its neighbors and opened its doors to trade. The resulting economic growth helped to underpin that same stability and openness. More recently, Sri Lanka's economy has expanded by more than 8 percent annually since the end of its civil war.

In this century as in previous ones, much of the investment boom in Sub-Saharan Africa has come from companies seeking to extract natural resources. Resource booms come and go, though, and commodities are eventually exhausted. What endures is human capacity, the greatest economic engine of all.