The continued quest for economic growth

The Global Agenda Outlook 2013 brought together Michael Spence, William R. Berkley Professor of Economics and Business, NYU Stern School of Business, and Fu Jun, Executive Dean and Professor of Political Economy, School of Government, Peking University. Scott Kalb, Chief Executive Officer, KLTI Advisors, moderated the discussion.

Q: Have we come to the end of the road in terms of productivity gains available to us in developed countries?

Fu Jun: To me, advanced economies seem to have exhausted the potential of this historical period called industrialization. Beyond industrialization, I have not been persuaded about additional sources of productivity increases in the developed world. We’ve been told wonderful stories about IT and service-oriented industries. If you employ IT, will that increase productivity? Yes, it may, but to what extent? We haven’t had a firm answer on that in spite of all kinds of research. With service-oriented firms – investment banking, legal services, accounting services, etc. – if you reconfigure assets on a global scale, will that increase productivity? It may, but again, to what extent? Looking back, the efficiency enhancement of these stories has been exaggerated.

But I do see additional sources of growth beyond industrialization in the advanced countries. If they underwent a process of re-industrialization – producing goods with a greener orientation – that could be a dramatic additional source of growth.
The precondition for that, however, is to recalibrate the financial sector so that it is proportional to the real economy – and that is a difficult policy issue, involving both economics and politics. Whether or not the kind of public policies that we currently have would allow a country like the US to re-industrialize with a greener orientation is open to question.

Then there’s technological progress, and here we should be careful – that may have negative distributional implications for the global economy. If we have a whole range of robotics to replace human labour, what is the implication for income redistribution? One scenario would be that you drive the gap between rich and poor further apart, distorting supply and demand and resulting in overcapacity. Now, if you have a mismatch between the supply-side and the demand-side on a global scale, that’s not good for the global economy.

Michael Spence: None of us ever knows where future growth is going to come from. If we were sitting here in 1980, although the Internet existed, nobody anticipated the enormous effects it would have. Long-term innovation and productivity-induced growth rates in advanced countries are probably 2-2.5% in real terms, and I’m not sure we have a good reason to think that will drop.

When I look at the US economy, we have nanotechnology, we have much more capable robotics, we have what’s sometimes called 3D printing and, although it may have major environmental effects, we have game-changing increments in energy coming through shale gas and oil. So, just focusing on the US economy, I would say there are pretty good reasons to believe in future growth. And developing countries haven’t come close to exhausting the potential of productivity catch-up – so that looks good as a growth engine for themselves and everybody else, too.

Q: Will growth be uneven in the developing world?

Michael Spence: The World Bank estimates that over the next 5 to 10 years, China will export something like 85-100 million jobs to earlier-stage developing countries, and that they will be replaced by higher-value-added activities. This is the opportunity of the century for the earlier stage developing countries, because for a long time they’ve been saying, rightly or wrongly, that they can’t compete with China. Well, China is moving on just like Korea did before, and now is their chance.

Fu Jun: Until recently, China’s growth strategy has had three drivers: exports, investment and consumption. With the world economy slowing down, exports are out. So you have investment and consumption. The problem with investment is that a high proportion of investment continues to be made by the government, not the private sector, and it’s not sustainable for the government to inject a lot of fiscal money into the system long term. So what is left is consumption. To sustain growth, China has to boost private consumption.

If one looks at growth potentials on the supply-side of the Chinese economy, the picture seems clear. As long as China continues to close the technological gap with advanced economies, there is huge potential. However, the picture is less clear on the demand-side. For the Chinese economy to move forward in the absence of strong exports, domestically it must have a reasonable match between supply-side growth potentials and demand-side growth potentials. Unless China is successful in achieving that, the economy will be in trouble.

Q: What is the proper role of the state in helping to foster growth?

Fu Jun: The ultimate source of growth is technological progress, so if you are at the frontier of human knowledge, you probably need to give a bigger role to the market as no one knows in advance what the next correct move is. But if you are behind that frontier, and in the game of catching up, it probably makes sense to give a bigger role to government. Being behind, at least you have a sense of direction. That being said, even in emerging markets we need to think carefully about proportionality between government and the market. If transitional economies like China want to continue to gain ground in terms of efficient allocation of resources, market-oriented reforms will continue to be very important.

Michael Spence: We live in a world of increasingly densely networked interconnectedness, where the interconnectedness is way ahead of regulatory governance structures. It looks and feels potentially volatile. In that context, what you need is government – regardless of whether it’s developing or advanced – that has the resources and capacity to respond to shocks: to provide bridging demand in the case of a demand shock, to invest heavily when structural change is required.

I completely agree with Fu Jun that the role of government, in a developing country on a multi-decade journey to be an advanced country, keeps changing. I also believe that we need a serious discussion in the advanced economies about whether or not, in a shock-prone world, we shouldn’t have a stronger emphasis on the asset side of the balance sheet. Now this can quickly become ideological. If you have policies that expand the asset side of the balance sheet in a big way, then you have the potential to mismanage it and start interfering in the economy. I think there’s a very interesting conversation to be had here about how you get the best of both worlds.

Q: What are the systemic risks leaders should be looking out for in 2013 and beyond?

Michael Spence: Number one would be Europe – the European Union is a flawed structure and they haven’t fixed it yet. Number two would be the US, because the government is split and that will make people nervous. Number three is China. As we’ve discussed, the country has an internal debate going on about the right model, and there are powerful vested interests involved. I don’t happen to be pessimistic, but there is a scenario in which the wrong people get hold of the reform agenda and it stalls. And at this stage of its growth, for China that would produce an immediate economic implosion.

Fu Jun: In China, the current system – halfway between plan and market – can foster corruption, which in turn can give rise to social and political tensions and add a further layer of complexity to economic development. If political powers monopolize factors of production while only utilizing markets for goods and services, and only some people have access to both sides of the equation, you will have a powerful institutional logic driving the gap between rich and poor. These negative implications for wealth distribution would eventually lead to weak domestic consumption. China must continue to press ahead with market-oriented reforms, including the rule of law, so that it has a better chance of moving out of the “middle-income trap” and becoming a higher-income country.

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