Overcoming Barriers to Growth
Author： Source： Date：2017-09-01
It is a great honor to participate in this forum and great pleasure to be able to visit Shenzhen for the first time. I am speaking this afternoon about the problem of slow growth, barriers to growth that are being experienced all over the world. Slow growth today presents a major economic global challenge. As all regions of the world today are currently experiencing reduced rates of growth relative to past performance. You might ask, is this really a big problem? After all, the world is richer today than it ever has been before. The United States is considerably richer today than it was twenty years ago. China is dramatically richer today than it was twenty years ago. So if the rate of growth slows down a little bit, is that really a big deal? I believe that it is. Because the stakes of economic growth go beyond the economic realm, go beyond material standards of living, and indeed involve or raise important social and political issues as well. Modern economy is a lot like riding a bicycle. If you stop peddling, stop going forward, you don’t just stand still and experience stability, and instead bad things happen. You fall down, you get cuts and bruises. If you are old like me, you may even break a bone. In the case of modern economies, when growth slows down, we see increases in social conflict. We are seeing this right now in the United States and Europe. A rise in nationalisms, xenophobia, protectionism,, all social problems then can cause even greater economic problems, and on and on in a vicious circle. So today I want to address barriers to growth, structural factors that are inhibiting growth both in advanced and less developed countries. Although slow growth today is a global phenomenon, we don’t have the same problem across the world. The problem is being experienced in advanced economies rather different from those being experienced in less developed economies. So I want to break those out and talk a little bit about both. First, though I will mention a barrier that’s shared by around the world these days That is the issue of the declining population growth. With respect to aggregate economic growth or aggregate gross domestic product, the effect of slowing population growth is obvious. Slow population growth translates into slower growth of the labor force. Labor is the major input into GDP. So, if that slows down, the output slows down as well. There isn’t an obvious connection between a slowdown in population growth and a slowdown in growth of GDP per capita? But there is evidence of an association between an aging population and slowing population growth and slower productivity growth.
Why might this be? First, innovation growth requires risk-taking, a certain spirit of adventure. And older population tend to be more conservative, more risk averse, less excited about change, more frightened by change, so you may expect to see less economic dynamism in older society than in the younger one. Also large markets incentivize innovation, because the returns from capturing a growing market are larger than capturing a smaller shrinking market. So population growth serves to increase the market size and therefore serves to stimulate innovation. So if population growth is slowing, or even going in reverse as the case of Japan, you may have reduced incentives for innovation. Now let me turn to problems that are specific to advanced economies. We have problems across the board. You can break down economic growth into four major components. First, growth in labor, that is hours worked per capita. Second, growth in labor quality， in the skill level of the work force. Third, investment, capital accumulation. And fourth, what we call total factor productivity growth, or growth in output per a given unit of capital in labor. In all of these areas in US, particularly, but also in Europe, we are seeing negative developments, troubling signs, slowing growth. First, hours worked, the actual input of labor. In the US the labor force participation has been falling over the course of the 21st century. Hours worked per capita has been falling as well. Part of this, is purely demographic. With the aging population, you have lower labor force participation, as more and more population consists of retirees and this is dampening the percentage of people who are engaged in the labor force. But also we are experiencing reductions in labor force participation above and beyond demographic factors. Specifically we are seeing a steep drop in labor force participation by younger workers and also by less-skilled workers. For younger workers, the causes are complex but at least part of it is that they are being priced out of the labor market with minimum wages. For less-skilled workers, decades of stagnant or even falling real wages for less-educated and less-skilled workers are breeding worker discouragement, causing more and more less skilled would-be workers to drop out of the labor force all together. And either support themselves through informal means or through the social safety net.
Secondly, labor quality or the skill level for labor work force. 20st century has experienced enormous gain in the skill level of work force due to huge investments in massive schooling. In the United States in 1900, only 6% of 18 year-olds graduated from high school. And only a tiny fraction graduated from university. By 1970, 80% of Americans graduated from high school. In the second half of 20th century, we saw large growth in college graduation rates. But that has stagnated since 1980. Still some of the growths are solely because of the rising graduation rate by women. The graduation rate for men has not risen since 1980. So we are seeing really the exhaustion of returns from investments in massive schooling. And therefore the skill level of work force is stagnated. The rising of skill level is a significant, obvious way to increase labor productivity. And that source of productivity growth is diminishing.
Next, growth by accumulating capital. But we in US are seeing flagging in growth in investments. Net investments of product has been declining gradually for decades, in keeping with our declining savings rate. So as a rich country, we tend to save less and less over time and that undermines their capacity to engage in productive investment. Finally, productivity growth, not grow the input, but figuring out some ways to get more output out of the dividend from the labor capital, what we call innovation. In the advanced countries, we have seen slow productivity growth for decades, really since the early 1970s. In the US, we have about a decade of robust productivity growth from the mid 1990s to mid 2000s. Europe did not experience that. And Japan, I did not believe, has experienced that. But even in the US, that is gone, and we’ve returned to the slow productivity growth of the 70s and 80s, and actually, in recent years, even slower than that average. So, in all of the basic components of GDP growth, we are all in gears that are flagging. For less developed economies, I’d like to mention two areas to growth, one external, that is simply weak growth in the advanced economies, which leads to reduced demand for exports from less developed economies. China, in particular, has been able to grow so rapidly because it did not have to rely purely on its domestic market. It re-hitched its wagon to demand in rich country markets, increase its market share in those markets and grow much faster than if it had relied purely on internal growth. So if rich country demand takers are off, those opportunities for export-led growth are diminishing as well. For an internal barrier in growth in less developed countries, I’d like to focus on what is called “the Middle Income Trap”. To understand this, and what the middle income trap means, is that when countries reached a certain level of GDP, we see characteristically a big drop-off in growth rates. So countries that have sustained growth rates of 7, 8, 10 percent for a long time and then hit a certain 15,000 dollars GDP per capita, range growth falls off. It doesn’t just take a fall, it falls off dramatically. Why would this be? To understand that, I think you’ll have to understand that there are two basic cons of economic growth. We call them “Catch-up Growth” and “Growth at the Technological Frontier”. So for catch-up growth, more less developed countries can grow more rapidly than rich countries at the frontier simply by borrowing technology, organizational techniques and business models from rich countries. Often this is simplified distinguishing between innovation on the one hand and simple imitation on the other hand. That’s not really fair, because there’s plenty of innovation that goes on in less developed countries. But it tends to take the form of adapting previously developed technologies and business models to local circumstances. That still, though, is easier than coming up with new technologies and business models from the scratch. So when you hit the technological frontier or get near it, then you will no longer be able to access that source of rapid growth and must, instead, innovate to power growth forward. So basically it’s you can walk much faster through a forest where the trail has already been blazed than you have to hack with it and shed it yourself. And once you’ve hit the frontier, that’s what you must do, and so things slow down immediately, but it can slow down a lot if you don’t have the policies and institutions that are optimal for life at the frontier. It turns out that some policies and institutions work perfectly well for poor countries to move from poverty up to middle income status. But those same policies and institutions may not work so well in powering growth or re-incentivizing growth or facilitating growth at the technological frontier. Indeed, because the policies and institutions that served so well for so long, have such a strong reputation and such strong defenders, they then become a significant barrier to the kinds of reforms that are needed to push our countries to thrive at the frontier.
So, what are the solutions? How do we overcome these barriers to growth? In the US, we have been talking about slow growth for quite a while since the great recession of 2007 to 2009. And one common theme that has emerged forecasting us throughout the future of growth is that we have, as the saying goes, “plucked all the low hanging fruit.” So there are easy sources of growth and we have exhausted the easy sources, the economy’s rather important, and we received a lot of attention for arguing that the most productive, most transformative technologies have all already been invented and technological progress in the future cannot possibly equal the transformative gear holes we saw in the late 19th and early 20th centuries. I don’t like that, but there is certainly the case that there are many one-off changes that had occurred from a rural, poor economy to a rich industrial, or even post-industrial economy but then can’t be replicated. So there is, I think, a truth to the idea that there are advantages to be in less advanced and as you get richer and richer, you do exhaust the lower hanging fruit and growth gets harder.
I would argue that today, the lower hanging fruit for rich countries and for less developed countries facing the middle income trap is policy reform. In countries around the world, it is obvious that economic policies are not optimized for economic growth. There are many policies that actively frustrate and retard innovation and dynamism. And so, if we are to return to the more robust growth we’d experienced in the past years, we are going to need to engage in significant policy reforms. In advanced economies, we see major work is centering over social policy, the social safety net and the labor market regulation that depress labor market participation. Throughout the world, improvements in education and training to boost labor quality, to boost skill levels, and thereby to boost labor productivity are certainly possible. And, throughout the world, there are barriers to entry, barriers to entrepreneurship, barriers to competition cartelized markets in which it’s difficult for new interests to enter and compete that slow innovation, slow in the fusion of innovations throughout the economy and thereby undermine productivity growth.
So if there are solutions, if there is low hanging fruit, is it possible to actually pluck it? Are these solutions really likely in the foreseeable future? Well, there are our reasons for hope. The growth slowdown, on the positive side, the silver lining to this dark plot, well, is that the growth slowdown sharpens incentives for policymakers to do the right thing and engage in pro-growth economic reform. When external conditions for growth are favorable, life is easier for policymakers. They can engage in the normal vices politicians everywhere to focus on distributing the pie rather than growing the pie. But when external conditions for growth deteriorate, and less policies improved, the economic reform deteriorates and that makes electorates and populations unhappy, restive, and puts pressure on politicians to boost economic performance. Certainly, in the US, we saw a big wave of economic deregulation and structural reform in the late 1970s and early 1980s in response to a long period of unsatisfactory economic reforms. Around the world, you see big economic reforms coming on the heels of disappointing economic performance. So there are legitimate reasons for hope. However, there are also reasons for fear, because it is certainly the case that when there is a growth slowdown, there is pressure for change. But the plan B, the alternative, could be worse than this fast forward and doesn’t have to be an improvement. In fact, that happens all too often. So it is possible that a growth slowdown can increase the risk of short-sighted and destructive policies. We are seeing that, I believe, right now, in both the US and Europe with the rise of economic populism, the rise of anti-immigration, anti-trade policies that could be very deleterious for growth.
So am I more hopeful, or fearful? I’m afraid, right now, as an American, with this very distressing election just around the corner, I’m more fearful. But that may be simply my perspective and I hope that I’m wrong, and I hope other countries can avoid some of the mistakes that we are currently making.
Thank you very much.
Brink Lindsey is the vice president for research at the Cato Institute. His research interests include trade policy, globalization, American social and cultural history, and the nature of human capital. His current researches center on economic growth and the policy barriers to growth.
Speech delivered at the China Economist Forum during the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
Why might this be? First, innovation growth requires risk-taking, a certain spirit of adventure. And older population tend to be more conservative, more risk averse, less excited about change, more frightened by change, so you may expect to see less economic dynamism in older society than in the younger one. Also large markets incentivize innovation, because the returns from capturing a growing market are larger than capturing a smaller shrinking market. So population growth serves to increase the market size and therefore serves to stimulate innovation. So if population growth is slowing, or even going in reverse as the case of Japan, you may have reduced incentives for innovation. Now let me turn to problems that are specific to advanced economies. We have problems across the board. You can break down economic growth into four major components. First, growth in labor, that is hours worked per capita. Second, growth in labor quality， in the skill level of the work force. Third, investment, capital accumulation. And fourth, what we call total factor productivity growth, or growth in output per a given unit of capital in labor. In all of these areas in US, particularly, but also in Europe, we are seeing negative developments, troubling signs, slowing growth. First, hours worked, the actual input of labor. In the US the labor force participation has been falling over the course of the 21st century. Hours worked per capita has been falling as well. Part of this, is purely demographic. With the aging population, you have lower labor force participation, as more and more population consists of retirees and this is dampening the percentage of people who are engaged in the labor force. But also we are experiencing reductions in labor force participation above and beyond demographic factors. Specifically we are seeing a steep drop in labor force participation by younger workers and also by less-skilled workers. For younger workers, the causes are complex but at least part of it is that they are being priced out of the labor market with minimum wages. For less-skilled workers, decades of stagnant or even falling real wages for less-educated and less-skilled workers are breeding worker discouragement, causing more and more less skilled would-be workers to drop out of the labor force all together. And either support themselves through informal means or through the social safety net.
Secondly, labor quality or the skill level for labor work force. 20st century has experienced enormous gain in the skill level of work force due to huge investments in massive schooling. In the United States in 1900, only 6% of 18 year-olds graduated from high school. And only a tiny fraction graduated from university. By 1970, 80% of Americans graduated from high school. In the second half of 20th century, we saw large growth in college graduation rates. But that has stagnated since 1980. Still some of the growths are solely because of the rising graduation rate by women. The graduation rate for men has not risen since 1980. So we are seeing really the exhaustion of returns from investments in massive schooling. And therefore the skill level of work force is stagnated. The rising of skill level is a significant, obvious way to increase labor productivity. And that source of productivity growth is diminishing.
Next, growth by accumulating capital. But we in US are seeing flagging in growth in investments. Net investments of product has been declining gradually for decades, in keeping with our declining savings rate. So as a rich country, we tend to save less and less over time and that undermines their capacity to engage in productive investment. Finally, productivity growth, not grow the input, but figuring out some ways to get more output out of the dividend from the labor capital, what we call innovation. In the advanced countries, we have seen slow productivity growth for decades, really since the early 1970s. In the US, we have about a decade of robust productivity growth from the mid 1990s to mid 2000s. Europe did not experience that. And Japan, I did not believe, has experienced that. But even in the US, that is gone, and we’ve returned to the slow productivity growth of the 70s and 80s, and actually, in recent years, even slower than that average. So, in all of the basic components of GDP growth, we are all in gears that are flagging. For less developed economies, I’d like to mention two areas to growth, one external, that is simply weak growth in the advanced economies, which leads to reduced demand for exports from less developed economies. China, in particular, has been able to grow so rapidly because it did not have to rely purely on its domestic market. It re-hitched its wagon to demand in rich country markets, increase its market share in those markets and grow much faster than if it had relied purely on internal growth. So if rich country demand takers are off, those opportunities for export-led growth are diminishing as well. For an internal barrier in growth in less developed countries, I’d like to focus on what is called “the Middle Income Trap”. To understand this, and what the middle income trap means, is that when countries reached a certain level of GDP, we see characteristically a big drop-off in growth rates. So countries that have sustained growth rates of 7, 8, 10 percent for a long time and then hit a certain 15,000 dollars GDP per capita, range growth falls off. It doesn’t just take a fall, it falls off dramatically. Why would this be? To understand that, I think you’ll have to understand that there are two basic cons of economic growth. We call them “Catch-up Growth” and “Growth at the Technological Frontier”. So for catch-up growth, more less developed countries can grow more rapidly than rich countries at the frontier simply by borrowing technology, organizational techniques and business models from rich countries. Often this is simplified distinguishing between innovation on the one hand and simple imitation on the other hand. That’s not really fair, because there’s plenty of innovation that goes on in less developed countries. But it tends to take the form of adapting previously developed technologies and business models to local circumstances. That still, though, is easier than coming up with new technologies and business models from the scratch. So when you hit the technological frontier or get near it, then you will no longer be able to access that source of rapid growth and must, instead, innovate to power growth forward. So basically it’s you can walk much faster through a forest where the trail has already been blazed than you have to hack with it and shed it yourself. And once you’ve hit the frontier, that’s what you must do, and so things slow down immediately, but it can slow down a lot if you don’t have the policies and institutions that are optimal for life at the frontier. It turns out that some policies and institutions work perfectly well for poor countries to move from poverty up to middle income status. But those same policies and institutions may not work so well in powering growth or re-incentivizing growth or facilitating growth at the technological frontier. Indeed, because the policies and institutions that served so well for so long, have such a strong reputation and such strong defenders, they then become a significant barrier to the kinds of reforms that are needed to push our countries to thrive at the frontier.
So, what are the solutions? How do we overcome these barriers to growth? In the US, we have been talking about slow growth for quite a while since the great recession of 2007 to 2009. And one common theme that has emerged forecasting us throughout the future of growth is that we have, as the saying goes, “plucked all the low hanging fruit.” So there are easy sources of growth and we have exhausted the easy sources, the economy’s rather important, and we received a lot of attention for arguing that the most productive, most transformative technologies have all already been invented and technological progress in the future cannot possibly equal the transformative gear holes we saw in the late 19th and early 20th centuries. I don’t like that, but there is certainly the case that there are many one-off changes that had occurred from a rural, poor economy to a rich industrial, or even post-industrial economy but then can’t be replicated. So there is, I think, a truth to the idea that there are advantages to be in less advanced and as you get richer and richer, you do exhaust the lower hanging fruit and growth gets harder.
I would argue that today, the lower hanging fruit for rich countries and for less developed countries facing the middle income trap is policy reform. In countries around the world, it is obvious that economic policies are not optimized for economic growth. There are many policies that actively frustrate and retard innovation and dynamism. And so, if we are to return to the more robust growth we’d experienced in the past years, we are going to need to engage in significant policy reforms. In advanced economies, we see major work is centering over social policy, the social safety net and the labor market regulation that depress labor market participation. Throughout the world, improvements in education and training to boost labor quality, to boost skill levels, and thereby to boost labor productivity are certainly possible. And, throughout the world, there are barriers to entry, barriers to entrepreneurship, barriers to competition cartelized markets in which it’s difficult for new interests to enter and compete that slow innovation, slow in the fusion of innovations throughout the economy and thereby undermine productivity growth.
So if there are solutions, if there is low hanging fruit, is it possible to actually pluck it? Are these solutions really likely in the foreseeable future? Well, there are our reasons for hope. The growth slowdown, on the positive side, the silver lining to this dark plot, well, is that the growth slowdown sharpens incentives for policymakers to do the right thing and engage in pro-growth economic reform. When external conditions for growth are favorable, life is easier for policymakers. They can engage in the normal vices politicians everywhere to focus on distributing the pie rather than growing the pie. But when external conditions for growth deteriorate, and less policies improved, the economic reform deteriorates and that makes electorates and populations unhappy, restive, and puts pressure on politicians to boost economic performance. Certainly, in the US, we saw a big wave of economic deregulation and structural reform in the late 1970s and early 1980s in response to a long period of unsatisfactory economic reforms. Around the world, you see big economic reforms coming on the heels of disappointing economic performance. So there are legitimate reasons for hope. However, there are also reasons for fear, because it is certainly the case that when there is a growth slowdown, there is pressure for change. But the plan B, the alternative, could be worse than this fast forward and doesn’t have to be an improvement. In fact, that happens all too often. So it is possible that a growth slowdown can increase the risk of short-sighted and destructive policies. We are seeing that, I believe, right now, in both the US and Europe with the rise of economic populism, the rise of anti-immigration, anti-trade policies that could be very deleterious for growth.
So am I more hopeful, or fearful? I’m afraid, right now, as an American, with this very distressing election just around the corner, I’m more fearful. But that may be simply my perspective and I hope that I’m wrong, and I hope other countries can avoid some of the mistakes that we are currently making.
Thank you very much.
Brink Lindsey is the vice president for research at the Cato Institute. His research interests include trade policy, globalization, American social and cultural history, and the nature of human capital. His current researches center on economic growth and the policy barriers to growth.
Speech delivered at the China Economist Forum during the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
