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Slower growth in China belies a new world of productivity opportunities

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COMMENTS

16 October 2012 10:43

There is more gloom about world economic growth, both short- and longer term. The IMF forecast for this year and next has just been revised down yet again and there is a clear downside even to this glum outlook.

Looking further ahead, veteran economist Robert Gordon explores the idea that the rise in productivity over the past two centuries might be an aberration in the broad sweep of history: the new normal for productivity growth in advanced countries like the US might be close to zero.

Let's start with the short-term outlook. The world economy came out of the global financial crisis in the usual way: growing at over 5 per cent in 2010 as it made up for some of the lost output of the downturn. But this petered out in the advanced countries in 2011, pulling the world back to 3.8 per cent growth.

When the IMF met six months ago, growth was forecast to slow further this year but pick up next year. In the Fund's newly-revised forecasts, almost all countries have had their forecasts trimmed for this year and next: a powerful message that the malaise in the advanced countries is infecting the whole world.

Even this feeble outlook assumes that a recovery is in sight, with world growth returning to 4 per cent over the course of 2013. This assumes that Europe will keep the show on the road and that the US will maintain its current rate of growth of around 2 per cent, in a year in which it has to resolve the 'fiscal cliff' and keep market confidence under control as the political battle on the budget plays out.

As in the past four years, the emerging countries are providing just about all the rise in per capita growth. Even with sluggish growth in international trade, China is still seen as growing at 7-8 per cent, India around 5 per cent and ASEAN around 5-6 per cent.

There is plenty of room to be pessimistic about the prospects of achieving even this lacklustre performance. At this stage of the cycle, with contagion sapping confidence just about everywhere, there is a tendency for country forecasters (who have quite a bit of input into the IMF forecasts) to resist the idea of a persistent under-performance. They accept the irrefutable evidence of current weakness, but argue for a quick bounce back. Why make things worse by talking the economy down?

Running parallel to this gloomy short-term outlook are arguments that structural longer-term growth rates will be lower in the future. Some of these apply to particular countries: the arguments that China's structural changes require a very much lower growth rate; arguments that emerging countries are in danger of running into the middle-income trap; and Gordon's arguments that the US (and other advanced countries) are exhausting the lifeblood of rising living standards: productivity.

If the short-term growth outlook has elements of 'whistling in the dark' to keep up confidence and therefore has substantial downside risk, the longer term pessimism seems overstated. The short-term forecasts overwhelmingly represent the outcome of policy failures in the advanced countries, rather than any intrinsic weakness in the dynamic of growth. When policy makers learn to do better, growth will be stronger.

The US is still labouring under the malign influence of the 2008 financial crisis, with the recovery hindered by seriously dysfunctional politics. Europe's mess is, similarly, a reflection of political failure. The current futile attempt to fix excessive debt through austerity will eventually be seen to be a failure and alternatives found, involving the write-off of excessive debt.

China's task is restructuring its demand to favour consumption rather than investment. This will take time, but there seems no pressing urgency for radical restructuring. Encouraging the public to consume more still seems an easier task than the more ubiquitous problem elsewhere of restraining consumption in order to fix the debt overhang.

As for the danger of the middle-income trap, there are enough examples of countries which have made this transition to assure us that it's not inevitable that countries will get stuck half-way along the journey to high living standards.

The most interesting growth pessimism is Gordon's concern that the engine of productivity will stall. You only get a once-off rise in living standards from electricity, improved hygiene, education, computers, women joining the workforce and falling infant mortality. Each one gives society a leg up, but is once-off. You have to keep inventing new things for the next leg up, and maybe all the best ideas have already been discovered and exploited.

Gordon worries that the productivity increases associated with electricity were more profound than more recent technology, no matter how awesome the technology of the information age. Certainly the measured productivity from recent innovation is lower, but this may reflect the way productivity is measured more than the slowing in improvement. When productivity was just a matter of producing more widgets with fewer workers, it was easier to measure. But the benefits of extended shopping hours, the ATM and day surgery are all understated as enhancements to living standards.

Some of the examples Gordon gives are to demonstrate that when you have arrived at a good outcome, you should rest on your laurels. When infant mortality is effectively zero we should regard that as success, not a reason for despair that we can't get any better. Even advanced America has many opportunities for further improvement: getting the unemployed back to work would be one example. Reducing income disparities, managerial improvements and protecting the environment all seem eminently achievable, and with those in place the advanced countries might be well pleased to grow more slowly, even perhaps work less and have more leisure.

Meanwhile, intentionally outside Gordon's purview, the rest of the world can benefit from the journey to the technological frontier, reaping massive productivity gains by applying already-existing technology. You can think of many things that might go wrong with this: for a start, it might put intolerable strain on global resources or the climate. Wars (or even business cycles) might cut living standards profoundly. But it seems unlikely that we are running out of worthwhile problems to solve, or the ability to so. 

Photo by Flickr user Pondspider.

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