Where Did the Advanced Economies Go Wrong?

June 20, 2011

According to IMF data, real GDP in the advanced industrialized economies expanded only 1.6% per annum during the eight years to 2010.  That was less than 60% as quick as the pace of expansion during the prior ten year to and including 2002 when GDP increased 2.8% per annum.

It’s much easier to identify this apparent slowdown in long-term potential growth than to explain why such is happening.  It is one thing to discover other things that occurred as growth slowed but quite a different matter to differentiate correlations from channels of causation.  One fact that jumps out is that growth in emerging and developing economies was accelerating  to 6.7% per annum in 2003-2010 from 4.1% per annum in the previous decade.   Free trade advocates believe that not everyone benefits equally from greater mobility of goods, services, capital and labor but that all ships generally rise with the tide.  The experience since 2003 suggests that globalization has been a competitive rather than cooperative sport with one broad group of nations benefiting at the expense of another.  Rankings of standards of living among nations are getting tighter not only because of faster development at the bottom but due to a slower rate of improvement at the top.

The problem may not be much freer trade but just the opposite.  The failed Doha Development Round of multilateral talks to reduce trade barriers marked a dramatic setback in the progressive post-World War II movement toward fewer barriers to international commerce.  The Doha talks began in November 2001 and were supposed to be completed by end-2004, that is six and a half years ago.  During the latter decades of the 20th century, the relationship between freer trade and economic growth was often likened to riding a bike in that nations had to keep pedaling to keep that symbiotic relationship between trade and overall economic activity moving forward.  The correlation of stalled trade-reduction talks and weaker growth among advanced nations had been anticipated long ago by many analysts, who saw the relationship in cause-and-effect terms.

Terrorist outlets of radical Islamism also seem to bear some responsibility for the slowdown of growth among advanced economies.  The 9-11 attacks happened two months before the start of the Doha Round and diverted substantial resources from consumable goods and services in everyday life to a new kind of national insurance against worst-case scenarios.  Al Qaeda was never going to win a conventional battlefield war against the West.  It’s mission instead was to destabilize life in the advanced economies in a profound way by creating modifications in Western behavior.

A different possible source of blame may involve the range of inventions and applied innovations seen over the past decade.  The focus in this age of magical devices has been in communication and information processing.  It’s not just that new stuff for purchase has become available but also that the process by which such things are bought has also been revolutionized.  The challenge to teach a body of knowledge, skills and etiquettes is magnified by the rapid rate of expansion of material to be learned and the shifting sands upon which frameworks for learning must rest.  Finding traction for economic growth seems to be easier for nations that have less, not more, previously invested existing infrastructures. 

Consumer electronics have created very impressionable mechanisms of persuasion.  The first of these was television, which fundamentally changed the way that political leaders are chosen and the skills and other personality traits needed to get elected.  People can be manipulated more easily to make decisions that are not in their best self interest.  That weakens the usefulness of democracy in the advanced nations, even as more less developed countries are shifting from authoritarian political systems to ones that vest greater political power with voters.  In most advanced country these days, people are very dissatisfied with the competence of their governments and the insoluble nature of basic problems like sky-high unemployment and debt.  Constant exposures of corruption of public and private-sector leaders hurts confidence as well.  In individuals the process can be a draining one.  In societies, it can be divisive and result in ideologically-inspired rather than practical approaches to social and economic problems. 

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.


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