Stunted growth: a return to the historical norm?
ECONOMICS:FEARS ABOUND that growth will not pick up sufficiently to lift crisis-hit countries out of the economic mire in which they find themselves.
These fears are well-founded. Growth rates across the developed world have been weakening for 50 years. The trend has been evident in the large economies and almost all of the smaller ones also.
This spells big trouble. The social contract in the rich world is predicated on open-ended economic expansion. A bigger pie means more resources can be invested in those services mostly provided by states – health, education and welfare in particular. Electorates have come to expect that such services will expand and improve continually.
But in recent decades, governments in most wealthy countries have come to depend on deficit spending to meet these expectations, even before the financial crisis that had led to high and/or rising public debt levels. Stabilising the debt-to-GDP ratio was the height of most governments’ ambitions.
But the financial crash was a shock for which rich economies were unprepared. It has pushed sovereign indebtedness up to, or beyond, record peace-time highs in many advanced economies. In order to continue to service these debts, growth is essential. As Ireland’s precarious position illustrates, along with many other high-debt economies, public debt dynamics will spin out of control without strong GDP growth.
Given the importance of growth to the social contract and state solvency, among other things, it is remarkable how little attention has been given to the slowing pace of expansion over the past half century.
In the US, Japan and almost all rich European countries, per capita GDP growth peaked in the 1950s or 1960s. It has been slowing without interruption since. In some countries, most notably Italy among the biggest economies, there has been next to no growth since the turn of the century.
Now, more than a quarter of the way through the 21st century’s second decade – and with the effects of fiscal crisis still reverberating – the 2010s are set to be the lowest growth decade in living memory.
Why is growth slowing?
First, let’s scotch the ideological arguments. Some free marketeers believe state expansion has flattened the growth-generating potential of private initiative. If that was the cause of the slowdown, the economies where the state is smallest would have grown more rapidly than the rest. But that has not happened. Per capita growth has converged at low levels across the developed world.
Some leftists have argued exactly the opposite – that the shift from state intervention since the 1980s caused the slowdown in growth. This view has as little grounding in evidence. The Nordic economies, where social democracy remains most prevalent, have not been spared the contraction in growth over the decades.
The deceleration in growth rates is perplexing. Markets and states now function better over time. Liberalisation and globalisation have produced more efficient markets, while an evidence-based learning process has improved policy design and is likely to have made delivery of public services more efficient. Both developments should have been positive for growth.
Most perplexing of all is that the growth slowdown has coincided with rising education levels and accelerating rates of technological advancement.
In the 1960s, universal secondary education was in its infancy and only a tiny number of (usually privileged) people had access to university. Today in the developed world, a shrinking proportion of people leave full-time education before the age of 16 and ever larger numbers achieve third-level qualifications. This should have boosted productivity by raising levels of human capital.
It has certainly caused the innovation process to accelerate. According to the World Intellectual Property Organisation, for instance, the number of patents filed globally doubled from one million in the mid-1990s to two million by 2010.
The advent of information technology has been transformative. For many people, it would be nigh impossible to do their jobs without computers and the internet.
It appears increasingly likely the developed world is returning to the very low growth rates that have been the historical norm over centuries. If that turns out to be the case, a great deal will change socially and political.