The Real Challenges to Growth

Advanced economies’ experience since the 2008 financial crisis has spurred a rapidly evolving discussion of growth, employment, and income inequality. That should come as no surprise: For those who expected a relatively rapid post-crisis recovery, the more things stay the same, the more they change.

Soon after the near-collapse of the financial system, the consensus view in favor of a reasonably normal cyclical recovery faded as the extent of balance-sheet damage – and the effect of deleveraging on domestic demand – became evident. But, even with deleveraging now well under way, the positive effect on growth and employment has been disappointing. In the United States, GDP growth remains well below what, until recently, had been viewed as its potential rate, and growth in Europe is negligible.

Employment remains low and is lagging GDP growth, a pattern that began at least three recessions ago and that has become more pronounced with each recovery. In most advanced economies, the tradable sector has generated very limited job growth – a problem that, until 2008, domestic demand “solved” by employing lots of people in the non-tradable sector (government, health care, construction, and retail).

Meanwhile, the adverse trends in income distribution both preceded the crisis and have survived it. In the US, the gap between the mean (per capital) income and the median income has grown to more than USD20,000. The income gains from GDP growth have been mostly concentrated in the upper quartile of the distribution. Prior to the crisis, the wealth effect produced by high asset prices mitigated downward pressure on consumption, just as low interest rates and quantitative easing since 2008 have produced substantial gains in asset prices that, given weak economic performance, probably will not last.

The growing concentration of wealth, together with highly uneven educational quality, is contributing to declines in intergenerational economic mobility, in turn threatening social and political cohesion. Though causality is elusive, there has historically been a high correlation between inequality and political polarization, which is one reason why successful developing-country growth strategies have relied heavily on inclusiveness.

Labor-saving technology and shifting employment patterns in the global economy’s tradable sector are important drivers of inequality. Routine white- and blue-collar jobs are disappearing, while lower-value-added employment in the tradable sector is moving to a growing set of developing economies. These powerful twin forces have upset the long-run equilibrium in advanced economies’ labor markets, with too much education and too many skills invested in an outmoded growth pattern.

All of this is causing distress, consternation, and confusion. But stagnation in the advanced countries is not inevitable – though avoiding it does require overcoming a daunting set of challenges.

First, expectations are or have been out of line with reality. It takes time for the full impact of deleveraging, structural rebalancing, and restoring shortfalls in tangible and intangible assets via investment to manifest itself. In the meantime, those who are bearing the brunt of the transition costs – the unemployed and the young – need support and those of us who are more fortunate should bear the costs. Otherwise, the stated intention of restoring inclusive growth patterns will lack credibility, undercutting the ability to make difficult but important choices.

Second, achieving full potential growth requires that the widespread pattern of public-sector underinvestment be reversed. A shift from consumption-led to investment-led growth is crucial, and it has to start with the public sector.

The best way to use the advanced countries’ remaining fiscal capacity is to restore public investment in the context of a credible multi-year stabilization plan. This is a much better path than one that relies on leverage, low interest rates, and elevated asset prices to stimulate domestic demand beyond its natural recovery level. Not all demand is created equal. We need to get the level up and the composition right.

Third, in flexible economies like that of the US, an important structural shift toward external demand is already underway. Exports are growing rapidly (outpacing import growth), owing to lower energy costs, new technologies that favor re-localization, and a declining real effective exchange rate (nominal dollar deprecation combined with muted domestic wage and income growth and higher inflation in major developing-country trading partners). Eventually, these structural shifts will offset a lower (and more sustainable) level of consumption relative to income, unless inappropriate increases in domestic demand short-circuit the process.

Fourth, economies with structural rigidities need to take steps to remove them. All economies must be adaptable to structural change in order to support growth, and flexibility becomes more important in altering defective growth patterns, because it affects the speed of recovery.

Finally, leadership is required to build a consensus around a new growth model and the burden-sharing needed to implement it successfully. Many developing countries spend a lot of time in a stable, no-growth equilibrium, and then shift to a more positive one. There is nothing automatic about that. In all of the cases with which I am familiar, effective leadership was the catalyst.

So, while we can expect a multi-year process of rebalancing and closing the gap between actual and potential growth, exactly how long it will take depends on policy choices and the speed of structural adjustment. In southern Europe, for example, the process will take longer, because there are more missing components of recovery in these countries. But the lag in identifying the challenges, much less in responding to them, seems fairly long almost everywhere.

Of course, the technological and demographic factors that underpin potential growth ebb and flow over longer (multi-decade) timeframes; and, regardless of whether the US and other advanced countries have entered a long-run period of secular decline, there really is no way to influence these forces.

But the immediate issue confronting many economies is different: restoring a resilient and inclusive growth pattern that achieves whatever the trend in potential growth permits.


2nd Year . February 2014 . No.12


Michael Spence

A Nobel Laureate in Economic, is Professor of Economics as New York University's Stern School of Business and Senior Fellow at the Hoover Institution. His latest book is The Next Convergence - The Future of Economic Growth in Multispeed World.

41 comments

  • Scotttob

    who sells the best generic viagra
    viagra no script
    buy viagra in dubai
    viagra no prescription
    viagra bottle price

    Scotttob Thursday, 21 September 2017 00:32 Comment Link
  • Kennithreuck

    cialis cheaper than viagra
    viagra without prescription
    prezzo del viagra da 25 mg
    viagra no prescription
    viagra generico da ems

    Kennithreuck Wednesday, 20 September 2017 16:42 Comment Link
  • DerrickFam

    online prescriptions
    Canadian Online Pharmacies
    canada drugs
    Canadian Online Pharmacy
    Top Rated Online Canadian Pharmacies

    DerrickFam Tuesday, 19 September 2017 02:27 Comment Link
  • Arthurmorry

    online canadian pharmacy
    online pharmacies canada
    Canadian Pharmacy
    online pharmacies in usa
    pharmacy online

    Arthurmorry Monday, 18 September 2017 19:46 Comment Link
  • AndrewBot

    best place to order cialis online
    cialis online canada pharmacy
    best place to buy cialis on line
    cialis online canada pharmacy
    mail order cialis generic

    AndrewBot Sunday, 17 September 2017 19:38 Comment Link
  • Carlosvog

    how much does 10mg cialis cost
    viagra online pharmacy
    buy viagra
    viagra 100mg price in india
    buy cialis online
    online cialis
    cialis 2x5mg

    Carlosvog Saturday, 16 September 2017 03:09 Comment Link
  • LouisSeaps

    easy get viagra prescription
    viagra online
    online viagra
    generische cialis nederland
    cialis buy
    buy cialis online
    cialis 20 mg reimport

    LouisSeaps Friday, 15 September 2017 11:28 Comment Link
  • Jasonmeack

    cocaine signs and symptoms
    alcohol rehab centers
    opiate withdrawal help
    alcohol rehab centers
    withdrawal from pain medication

    Jasonmeack Sunday, 10 September 2017 03:37 Comment Link
  • DennisGer

    show me a picture of a viagra pill
    viagra without prescription
    buy pfizer viagra australia
    viagra without a doctor prescription
    buy viagra delhi

    DennisGer Tuesday, 05 September 2017 07:56 Comment Link
  • Anthonyloxia

    sildenafil citrate 100mg info
    viagra without doctor
    sildenafil medana 100mg
    viagra without a doctor prescription
    se puede comprar viagra en las farmacias sin receta medica

    Anthonyloxia Monday, 04 September 2017 20:33 Comment Link

Leave a comment

Make sure you enter the (*) required information where indicated.Basic HTML code is allowed.

Latest News

Ethiopia to Host the 4th International Coffee Conference

Ethiopia to Host the 4th International Coffee Conference

Ethiopia is set to host the 4th International Coffee Conference from March 6 – 8, 2016 in Addis Ababa at the United Nations Conference Center. Previous conferences were held  in England in 2001, Brazil in 2005 and Guatemala in 2010. Read more

Most Popular

  • 1
  • 2
Prev Next

The White-Box of Ethiopian Agriculture

The agricultural sector remains our Achilles heel, nonetheless, we remain convinced that agricultural-based development remains the only source of hope ...

Read more

For Whoever Has, to Him Shall be Given …

As the Ethiopian government seeks to transform the economy into one that’s rooted in manufacturing, the simplicity for local investors to access finance...

Read more

Commentary

  • 1
  • 2
  • 3
Prev Next

Shooting in the Dark: The Anomalies of Headhunting

The war for ‘heads’ – also known as talent – has been raging for many years and the manner headhunters ‘poach’ people is getting tougher ...

Read more

Understanding Chinese Investment in Ethiopia A Critical Evaluation of the World Bank’s “Chinese FDI in Ethiopia” Survey

The World Bank country office in Ethiopia, apparently in response to the request by the government of Ethiopia, has conducted a survey of...

Read more

Mitigating Growing Income Inequality: What Needs to Be Done

Rising income and wealth inequality in many countries around the world has been a long-term trend for three decades or more. But the atte...

Read more

View Point

  • 1
  • 2
  • 3
Prev Next

Delivering Life Insurance: The Untapped Market in Ethiopia

Modern insurance transaction in Ethiopia was started by an Egyptian Bank in 1905. According to Ethiopian Chamber of Commerce there were 19, 33 and 40 insuran...

Read more

Headache When a Key Personnel leaves a Company in the Financial Sector

The financial sector in Ethiopia has undergone considerable changes in recent decades. The dramatic rise of new market players into the sector has vividly al...

Read more

Women and the World Economy

In many countries, public debate about gender equality focuses mainly on women’s access to top positions and high-powered career opportunities. But the “glas...

Read more