How will returns to growth be shared amid industrial policy, ageing and automation

History shows that severe economic disruptions can prompt countries to rethink the role of government in the marketplace. After the disruptions of the last five years, spurred by the COVID-19 pandemic and the Russian invasion of Ukraine, there are signs that such a review is now underway.

Policymakers worldwide are paying new attention to how growth is achieved and using industrial policy to change the economy’s structure.

President Biden’s economic policies have mobilized public financing in the United States to accelerate the green transition and reshape supply chains. European leaders have embraced similar policies.

Italian Economist and former European Central Bank president Mario Draghi’s recent report on the future of European competitiveness envisions a dramatic increase in state investment as part of a new industrial policy.

Alongside the renewed embrace of industrial policy in countries that had previously moved away from such intervention, governments are also turning to economic statecraft to address perceived imbalances in the global economy.

Arguably, the uneven application of national industrial policies across the core of the global trading system has provoked rising interest in industrial policy in places like the United States, where it has languished for decades. American and European policymakers have recently imposed tariffs and export controls, primarily targeting China.

For its part, China has a renewed focus on “self-sufficiency.” It justifies such measures for want of control over production and supply chains and national security reasons related to access to sensitive technologies.

As governments seek to reshape markets, retool supply chains and redistribute trade gains, growth returns are less likely to be shared across borders as countries focus on domestic distribution.

Many global economic policymakers have long sought to revitalize growth in the face of demographic shifts and technological transformation. However, global growth is at its lowest rate in decades and the slowdown is delaying convergence in living standards between developed and developing economies.

The expectation was that resurgent productivity and renewed capital formation could revitalize growth.

Developed economies (plus China) need productivity growth to replace ageing workers. Developing economies need productivity growth that stems from improved jobs and leads to better standards of living, which has traditionally meant moving from the agricultural sector to manufacturing to services.

These two goals may come into conflict thanks to the combination of a demographic trend, ageing and a technological force, automation.

Since the 1970s, an abundant global labour supply has fueled generally robust economic growth. But today, most of the world’s workforce is ageing rapidly, ending this era.

As the working-age populations of many countries grow older and retire, governments will face major fiscal challenges from surging health care and pension costs. Aside from fiscal pressures, demographic trends could favour workers in the short term by supporting wage growth.

This assertion is especially true in advanced economies, where manufacturing investment is rising as policymakers use public financing to “crowd-in” investment in new factories, especially those producing advanced technologies.

These concurrent trends should benefit mid- to lower-skilled workers in advanced economies who have suffered from lagging wages in recent decades. Due to the simple economics of greater demand and lesser supply, these workers should see an earnings boost.

But demographics is not the only force in motion. We are also entering a new and accelerating phase of automation, driven by robotics, sensors, machine learning and more advanced artificial intelligence (e.g. generative AI).

These new automation technologies will lead to further efficiency gains and could eliminate repetitive jobs and tasks that wear on bodies or minds.

These technologies may also solve the supply challenges posed by an ageing workforce but they could also create a demand challenge. Output potential will rise, although job displacement could leave some workers unemployed and depress wages for others.

Meanwhile, automation benefits will flow largely to the top 20% of workers, comprising highly compensated, highly skilled workers and owners of capital. Such skilled workers may become increasingly scarce. As a result, automation could increase income inequality and by extension, wealth inequality in developed economies.

On the other end of the spectrum, developing markets hoping to copy the export-led growth model of Japan, the Asian Tigers (South Korea, Taiwan, Singapore and Hong Kong) and China face a new dilemma.

By depressing wages in advanced economies, automation may depress demand for exports. But even if wages in advanced economies remain unaffected, automation could still upend growth models.

During the period of globalization, capital frequently followed demography, flowing from older to younger countries. These capital flows and the associated technology transfer enabled the growth of manufacturing sectors in developing economies.

However, the spread of automation should render large pools of undifferentiated labour less valuable as capital productivity rises, creating a cheaper substitute for labour.

If automation slows capital inflows, it would stymie manufacturing-led growth in much of the developing world. At the same time, new technologies are poised to make smaller-scale manufacturing more cost-efficient, allowing developed economies to rely more on localized production and less on manufacturing facilities in developing markets.

In short, alongside the new competitive dynamics introduced by the adoption of industrial policies, the combination of demographic forces represented by ageing populations and technological forces like automation will make it more challenging to share the returns to growth equitably.

Policymakers are intensely focused on improving the structural composition of growth, making it more sustainable and secure. However, they should not lose sight of the importance of ensuring that the benefits of growth remain widely distributed.

The authors, Karen Harris and Esfandyar Batmanghelidj, are members of the Global Future Council on the Future of Growth.