Bar­ri­ers to growth threaten the post-Covid re­cov­ery

Bal­loon­ing gov­ern­ment debt is the prin­ci­pal fac­tor that could cause pro­longed down­turn across the world

The Daily Telegraph - Business - - Business Comment - Dam­bisa moyo

While the world re­mains mired in the Covid-19 cri­sis and its eco­nomic fall­out, econ­o­mists’ thoughts are none­the­less turn­ing to the post-pan­demic land­scape. With this in mind, there are five ma­jor bar­ri­ers to growth in the years ahead.

First, gov­ern­ment bal­ance sheets will get even big­ger than they al­ready are, with both fis­cal deficits and pub­lic debt con­tin­u­ing to ex­pand in mon­e­tary terms.

At the start of this year, to­tal global debt as a share of GDP had al­ready passed 300 per cent, with the IMF warn­ing that global gov­ern­ment debt will sur­pass, and re­main above, 100 per cent for at least the next two years.

Ma­jor economies such as the UK and US have al­ready breached this ra­tio in re­spond­ing to Covid-19.

Back in 2012, An­gela Merkel warned about the scale of Europe’s wel­fare sys­tem, point­ing out that a re­gion rep­re­sent­ing roughly 7 per cent of the world’s pop­u­la­tion and 25 per cent of global GDP ac­counted for 50 per cent of global wel­fare pay­ments.

Euro­pean gov­ern­ment spend­ing has only grown since then. In 2018, the US and the EU to­gether rep­re­sented 12 per cent of the world’s pop­u­la­tion, and half of global GDP, but 90 per cent of global wel­fare pay­ments.

A sec­ond bar­rier to growth is the state’s ex­pand­ing role in the econ­omy. Since the 2008 cri­sis, gov­ern­ments’ poli­cies have gone far be­yond tra­di­tional fis­cal stim­u­lus, while cen­tral banks pur­sue loose mon­e­tary poli­cies, re­duc­ing bench­mark rates to near, or be­low, zero.

Ad­di­tional struc­tural fac­tors sug­gest the state’s eco­nomic foot­print will con­tinue to ex­pand, with economies around the world con­fronting mas­sive un­em­ploy­ment as a re­sult of the cri­sis. Any re­cov­ery will likely be driven heav­ily by tech­nol­ogy, rais­ing the prospect of labour-re­plac­ing au­to­ma­tion and the cre­ation of a job­less un­der­class. In short – a more au­to­mated, digi­tised work­force with more long-term un­em­ploy­ment.

So, high un­em­ploy­ment and low growth will make it even more likely that the state’s enor­mous ex­pan­sion will be­come per­ma­nent.

Third, as gov­ern­ment rapidly ex­pands, the pri­vate sec­tor shrinks. The pri­vate sec­tor’s con­tri­bu­tion to GDP around the world was al­ready in de­cline.

In the UK, its out­put shrank for four con­sec­u­tive quar­ters up to Septem­ber 2019, rep­re­sent­ing Bri­tish en­ter­prise’s poor­est run in more than 25 years. In fact, even as head­line UK GDP in­creased by 1.8 per cent in Septem­ber 2019, pri­vate sec­tor out­put ac­tu­ally fell by 0.8 per cent. A num­ber of fac­tors ex­plain this trend. There are fewer pub­licly traded com­pa­nies to­day than there were 20 years ago.

Many firms are look­ing to avoid the added trans­parency and scru­tiny that reg­u­la­tors and mar­kets de­mand while, at the same time, many in­dus­tries are con­sol­i­dat­ing, with ac­qui­si­tions no longer listed on stock mar­kets.

A fourth ma­jor bar­rier to growth will come from tax and reg­u­la­tory pol­icy, where there is grow­ing pres­sure to ad­dress mar­ket con­cen­tra­tion.

Fewer com­pa­nies – some the prod­uct of merg­ers, oth­ers nat­u­ral mo­nop­o­lies through growth – have come to dom­i­nate sec­tors such as bank­ing, en­ergy, phar­ma­ceu­ti­cals, air­lines, and tech­nol­ogy.

The five largest US tech­nol­ogy com­pa­nies are not only dom­i­nant in their own sec­tor – they also rep­re­sent 20 per cent of the en­tire US stock mar­ket.

This con­cen­tra­tion of mar­ket power in a few firms’ hands risks lead­ing to in­creased tax­a­tion and reg­u­la­tory scru­tiny, po­ten­tially harm­ing the econ­omy’s lead­ing growth en­gines.

Fi­nally, the post-pan­demic era will likely be a pe­riod of ac­cel­er­ated de­glob­al­i­sa­tion, as pre-cri­sis trends to­ward pro­tec­tion­ism be­come fur­ther en­trenched.

These pro­tec­tion­ist poli­cies re­flect broader chal­lenges to the lib­eral in­ter­na­tional or­der as gov­ern­ments seek to de­fend do­mes­tic in­dus­tries, as a re­sponse to pop­ulist pres­sure at home work­ers and other con­stituen­cies.

At this point, all five pil­lars of glob­al­i­sa­tion – trade, cap­i­tal flows, im­mi­gra­tion, the spread of ideas and mul­ti­lat­eral in­sti­tu­tions – are in­creas­ingly un­der threat.

Aside from the es­ca­lat­ing trade and tech­nol­ogy con­flicts be­tween the West and China, as well as on­go­ing Brexit ne­go­ti­a­tions, global cap­i­tal flows are de­clin­ing, and pop­ulist po­lit­i­cal move­ments have brought more pres­sure to bear on mi­gra­tion.

Fur­ther­more, the spread of ideas is now also at risk, not least due to the rise of the “splin­ter­net”.

Within the next decade, the global in­ter­net could be di­vided be­tween com­pet­ing China and US-led tech­no­log­i­cal spheres.

Such frag­men­ta­tion – of data, plat­forms, and pro­to­cols – would fur­ther dis­rupt global sup­ply chains, adding to the pan­demic-re­lated eco­nomic dam­age.

To­gether, these trends fur­ther threaten to dis­rupt the global econ­omy and add to the pan­demic-re­lated eco­nomic dam­age.

Covid-19 has mag­ni­fied large risks that were al­ready there, and re­vealed the ex­tent of bar­ri­ers to growth in the com­ing decade.

Un­less these bar­ri­ers are recog­nised and ad­dressed, the global econ­omy faces a pro­longed eco­nomic down­turn, re­gard­less of how quickly the pan­demic is brought un­der con­trol.

Dr Dam­bisa Moyo is a Zam­bian econ­o­mist and au­thor who serves on the boards of Chevron Cor­po­ra­tion and the 3M Com­pany. She for­merly worked for the World Bank and Gold­man Sachs and has writ­ten four New York Times best­selling books

‘Covid-19 has mag­ni­fied large risks that were al­ready there and re­vealed the ex­tent of bar­ri­ers to growth’

An­gela Merkel, pic­tured this week in Ber­lin, warned eight years ago of the risks of wel­fare spend­ing

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