The growth co­nun­drum

Financial Mirror (Cyprus) - - FRONT PAGE -

The world faces a ma­jor dilemma. While rapid eco­nomic growth, such as that re­alised over the past 50 years, is crit­i­cal to sup­port devel­op­ment, we now also know that it can have se­ri­ous ad­verse con­se­quences, par­tic­u­larly for the en­vi­ron­ment. How can we bal­ance the im­per­a­tives of growth and devel­op­ment with the need to en­sure sus­tain­abil­ity?

The un­prece­dented growth of per capita in­come dur­ing the last 20 years has lifted more than one bil­lion peo­ple out of ex­treme poverty. In de­vel­op­ing coun­tries, life ex­pectancy has in­creased by 20 years since the mid-1970s, and the il­lit­er­acy rate among adults was al­most halved in the last 30 years.

But rapid eco­nomic growth has placed enor­mous pres­sure on the en­vi­ron­ment. More­over, it has been ac­com­pa­nied by ris­ing in­come in­equal­ity, which has now reached his­toric highs within many coun­tries (though, across coun­tries, such in­equal­ity has de­clined). Given this, one might ar­gue that slower growth would be good for the world.

In that case, the so­lu­tion would be at hand. Ac­cord­ing to a new re­port by the McKin­sey Global In­sti­tute (MGI), aging pop­u­la­tions and de­clin­ing fer­til­ity rates in many parts of the world could dampen global growth con­sid­er­ably over the next 50 years.

In­deed, even if pro­duc­tiv­ity were to ex­pand at the same rapid rate as dur­ing the last half-cen­tury, global growth would fall by 40%, far be­low the ane­mic rate of the last five years. Em­ploy­ment growth is also set to slow sig­nif­i­cantly. As a re­sult, even with slower pop­u­la­tion growth, per capita in­come growth would fall by about 19%.

To be sure, GDP would still triple, and per capita in­come would dou­ble, over the next 50 years. Nonethe­less this rate of long-term growth would con­sti­tute a sharp break with the six-fold GDP ex­pan­sion and nearly three-fold in­crease in per capita in­come of the last 50 years.

De­spite its po­ten­tial benefits, es­pe­cially for the en­vi­ron­ment, the i mpend­ing growth slow­down car­ries sig­nif­i­cant risks. While growth is not an end in it­self, it en­ables the achieve­ment of a broad set of so­ci­etal goals, in­clud­ing the cre­ation of eco­nomic and em­ploy­ment op­por­tu­ni­ties for mil­lions of vul­ner­a­ble and poor peo­ple and the pro­vi­sion of so­cial goods like ed­u­ca­tion, health care, and pen­sions.

So, how do we en­sure that th­ese im­per­a­tives are ful­filled, de­spite de­mo­graphic and en­vi­ron­men­tal con­straints? The first step is to se­cure eco­nomic growth through pro­duc­tiv­ity gains.

The needed ac­cel­er­a­tion in pro­duc­tiv­ity growth – by 80% to sus­tain over­all GDP growth and by 22% to sus­tain per capita in­come growth at the rates of the last half-cen­tury – is daunt­ing. But, based on case stud­ies in five eco­nomic sec­tors, the MGI re­port finds that achiev­ing it, though “ex­tremely chal­leng­ing,” is pos­si­ble – and with­out re­ly­ing on un­fore­see­able tech­no­log­i­cal ad­vances.

Three-quar­ters of the po­ten­tial pickup in pro­duc­tiv­ity could come from “catch-up” im­prove­ments, with coun­tries tak­ing steps – mod­ernising their re­tail sec­tors, con­sol­i­dat­ing au­to­mo­bile pro­duc­tion into a smaller num­ber of larger fac­to­ries, im­prov­ing health-care ef­fi­ciency, and re­duc­ing food-pro­cess­ing wastage – that have al­ready proven ef­fec­tive else­where. The rest can come from tech­no­log­i­cal, op­er­a­tional, and busi­ness in­no­va­tions – for ex­am­ple, de­vel­op­ing new seeds to in­crease agri­cul­tural yields, us­ing new ma­te­ri­als (such as car­bon-fiber com­pos­ites) to make cars and air­planes lighter and more re­silient, or digi­tis­ing med­i­cal records.

An­other sig­nif­i­cant growth op­por­tu­nity

lies in boost­ing the em­ploy­ment and pro­duc­tiv­ity of women. To­day, only about half of the world’s work­ing-age women are em­ployed. They earn about three-quar­ters as much as men in the same oc­cu­pa­tions, and are over-rep­re­sented in in­for­mal, tem­po­rary, and low-pro­duc­tiv­ity jobs.

Even if gains in fe­male labour-force par­tic­i­pa­tion and re­source-ef­fi­cient pro­duc­tiv­ity growth sus­tain high rates of eco­nomic growth, one key chal­lenge re­mains: in­come in­equal­ity. In fact, there is no sim­ple re­la­tion­ship be­tween growth and in­come in­equal­ity; af­ter all, in­equal­ity has been in­creas­ing in both slow-grow­ing de­vel­oped economies and fast-grow­ing emerg­ing economies.

Ac­cord­ing to the French econ­o­mist Thomas Piketty, in­come in­equal­ity rises when the re­turn on cap­i­tal ex­ceeds eco­nomic growth, mean­ing that, by it­self, faster eco­nomic growth would re­duce in­equal­ity. Us­ing a dif­fer­ent ap­proach, econ­o­mists at the In­ter­na­tional Mon­e­tary Fund also find a pos­i­tive re­la­tion­ship be­tween lower in­come in­equal­ity and faster growth, con­clud­ing that poli­cies that re­dis­tribute in­come can foster faster, more sus­tain­able growth.

Growth still mat­ters. As de­mo­graphic tail­winds turn into head­winds, and en­vi­ron­men­tal chal­lenges be­come ever more ap­par­ent, busi­nesses and gov­ern­ments need to think care­fully about how to im­prove re­source ef­fi­ciency while fos­ter­ing more in­clu­sive eco­nomic growth.

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