Are party politics stalling economic growth?

Here at the Global Agenda Councils in Abu Dhabi, I took part in a discussion on economic policy today. The question my fairly global group looked at was simple, yet mind-bogglingly complex: how come all governments say they want more economic growth but so few of them implement the right policies to bring it about?

It’s not that they are unsure about what to do. Economists the world over agree on the basic ingredients of a successful economy, which include the rule of law, sound institutions and clever public investment in infrastructure, health and education. Short-term fixes, such as devaluing the currency or ramping up public spending, do not deliver long-term growth. Nor does politicians’ obsession with “sexy” topics. Many countries have ambitious if poorly thought-out plans to support small companies and tech entrepreneurs; yet they could probably achieve a lot more by rewriting their bankruptcy laws or simplifying their tax systems.

As always at such discussions, our group was tempted to call for “leadership”. But it might be more fruitful to ask why politicians act the way they do.

In electoral democracies, the desire to win the next election is often stronger than the conviction to work for longer-term change. Rather than bemoan that fact, countries might want to think about what kind of political system can generate a cross-party consensus that allows a reform agenda to survive the next election cycle. It’s a tricky balance: deep political polarization is bad for growth but so is too much consensus, which can lead to complacency.

Incentives for policy-makers also come from society. Countries with lots of old age pensioners will put less emphasis on education and might be more risk-averse. Dual labour markets (in which one part of the workforce has cushy, secure jobs while another part oscillates between precarious temporary jobs and unemployment) often prevent politicians from liberalizing labour markets.

Markets can also determine how politicians act. In the 1990s, the countries of Central and Eastern Europe were in such intense competition for foreign investment that they rushed through pro-business reform agendas. In the US and Germany, the states (or Länder) often compete against each other and hence serve as laboratories for economic policies.

Of course, my group didn’t come up with the answer to what is one of the most fundamental questions in economics today. But I liked that we did not stop at the customary call for “leadership”. We do not need to abolish the electoral cycle to achieve growth. But we need to find ways of aligning interest, letting market forces play and encouraging economic participation.

Author: Katinka Barysch is a World Economic Forum Young Global Leader who is participating in the Summit on the Global Agenda in Abu Dhabi. She is Director of Political Relations at Allianz SE, and a Member of theGlobal Agenda Council for Geopolitical Risk. The views expressed here are her own.

Image: A worker at a factory cuts fabric printed with U.S. flags REUTERS/Nir Elias.