The Continued Quest for Economic Growth
The Continued Quest for Economic Growth
The global financial crisis revealed the interconnected nature of the world’s economies, highlighting the need for coordinated global policy and governance. Five years on, restoring sustainable economic growth remains a top priority for policy-makers around the globe, but it remains an elusive goal. Where has growth gone and how can it be restored in today’s volatile, interconnected world?
Q: Have we come to the end of the road in terms of productivity gains available to us in developed countries?
Fu Jun: To me, advanced economies seem to have exhausted the potential of this historical period called industrialization. Beyond industrialization, I have not been persuaded about additional sources of productivity increases in the developed world. We’ve been told wonderful stories about IT and service-oriented industries. If you employ IT, will that increase productivity? Yes, it may, but to what extent? We haven’t had a firm answer on that in spite of all kinds of research. With service-oriented firms – investment banking, legal services, accounting services, etc. – if you reconfigure assets on a global scale, will that increase productivity? It may, but again, to what extent? Looking back, the efficiency enhancement of these stories has been exaggerated.
Then there’s technological progress, and here we should be careful – that may have negative distributional implications for the global economy. If we have a whole range of robotics to replace human labour, what is the implication for income redistribution? One scenario would be that you drive the gap between rich and poor further apart, distorting supply and demand and resulting in overcapacity. Now, if you have a mismatch between the supply-side and the demand-side on a global scale, that’s not good for the global economy.
When I look at the US economy, we have nanotechnology, we have much more capable robotics, we have what’s sometimes called 3D printing and, although it may have major environmental effects, we have game-changing increments in energy coming through shale gas and oil. So, just focusing on the US economy, I would say there are pretty good reasons to believe in future growth. And developing countries haven’t come close to exhausting the potential of productivity catch-up – so that looks good as a growth engine for themselves and everybody else, too.
Q: Will growth be uneven in the developing world?
Michael Spence: The World Bank estimates that over the next 5 to 10 years, China will export something like 85-100 million jobs to earlier-stage developing countries, and that they will be replaced by higher-value-added activities. This is the opportunity of the century for the earlier stage developing countries, because for a long time they’ve been saying, rightly or wrongly, that they can’t compete with China. Well, China is moving on just like Korea did before, and now is their chance.
Regardless of whether it’s a developing or advanced economy, what you need is a government that has the resources and the capacity to respond to shocks.
Fu Jun: Until recently, China’s growth strategy has had three drivers: exports, investment and consumption. With the world economy slowing down, exports are out. So you have investment and consumption. The problem with investment is that a high proportion of investment continues to be made by the government, not the private sector, and it’s not sustainable for the government to inject a lot of fiscal money into the system long term. So what is left is consumption. To sustain growth, China has to boost private consumption.
If one looks at growth potentials on the supply-side of the Chinese economy, the picture seems clear. As long as China continues to close the technological gap with advanced economies, there is huge potential. However, the picture is less clear on the demand-side. For the Chinese economy to move forward in the absence of strong exports, domestically it must have a reasonable match between supply-side growth potentials and demand-side growth potentials. Unless China is successful in achieving that, the economy will be in trouble.
Q: What is the proper role of the state in helping to foster growth?
Fu Jun: The ultimate source of growth is technological progress, so if you are at the frontier of human knowledge, you probably need to give a bigger role to the market as no one knows in advance what the next correct move is. But if you are behind that frontier, and in the game of catching up, it probably makes sense to give a bigger role to government. Being behind, at least you have a sense of direction. That being said, even in emerging markets we need to think carefully about proportionality between government and the market. If transitional economies like China want to continue to gain ground in terms of efficient allocation of resources, market-oriented reforms will continue to be very important.
If industrialized nations underwent a process of re-industrialization – producing goods with a greener orientation – that could be a dramatic additional source of growth.
Michael Spence: We live in a world of increasingly densely networked interconnectedness, where the interconnectedness is way ahead of regulatory governance structures. It looks and feels potentially volatile. In that context, what you need is government – regardless of whether it’s developing or advanced – that has the resources and capacity to respond to shocks: to provide bridging demand in the case of a demand shock, to invest heavily when structural change is required.
I completely agree with Fu Jun that the role of government, in a developing country on a multi-decade journey to be an advanced country, keeps changing. I also believe that we need a serious discussion in the advanced economies about whether or not, in a shock-prone world, we shouldn’t have a stronger emphasis on the asset side of the balance sheet. Now this can quickly become ideological. If you have policies that expand the asset side of the balance sheet in a big way, then you have the potential to mismanage it and start interfering in the economy. I think there’s a very interesting conversation to be had here about how you get the best of both worlds.
Q: What are the systemic risks leaders should be looking out for in 2013 and beyond?
Fu Jun: In China, the current system – halfway between plan and market – can foster corruption, which in turn can give rise to social and political tensions and add a further layer of complexity to economic development. If political powers monopolize factors of production while only utilizing markets for goods and services, and only some people have access to both sides of the equation, you will have a powerful institutional logic driving the gap between rich and poor. These negative implications for wealth distribution would eventually lead to weak domestic consumption. China must continue to press ahead with market-oriented reforms, including the rule of law, so that it has a better chance of moving out of the “middle-income trap” and becoming a higher-income country.
Insights revealed by discussions on economics during the Summit on the Global Agenda 2012:2
- The financial industry is experiencing a severe deterioration of trust amplified by structural breakdown and the crisis of 2007-09. There is no easy solution to restore trust within the system, as it will require time for financial institutions to prove their value through continued actions. However, possible solutions include transparency on the strategic direction and activities of financial institutions, and a more harmonized supervisory system.
- Investment in innovation, technology and productivity should be increased to reduce inequality. Through government investment in these areas, the right environment will be created for the private sector to flourish and ultimately create jobs. Rent-seeking and any efforts by governments to deal directly with employment yield very limited results.
- The European fiscal crisis has proved once again the interconnected nature of global economies and the contagion of consequences that policies in one country or region may have on the rest of the world. Thus, facilitating adjustment processes that are globally compatible remains a key challenge for the international monetary system.
For more information on the Summit, please visit www.weforum.org/events/summit-global-agenda-2012.