When will the global economy return to rapid growth?
More than six years have passed since the subprime mortgage crisis began in the US in the summer of 2007. In the following year, it spread to the entire world economy. Its consequences have not been fully overcome yet. Thus it’s not surprising that economists’ attention has been largely devoted to short-term, crisis-related issues like financial deleveraging and repairing the balance sheets of governments, corporations and households. For the macroeconomic policy debate, this means concentrating on demand management by using monetary and fiscal policy tools in order to return to a pre-crisis growth path. Rarely has the question been asked of whether or not this is a realistic goal, i.e., whether post-crisis growth can return to pre-crisis levels. An analysis of growth perspectives in the medium-to-longterm calls for using the neo-classical growth theory, according to which there are three factors at play: labor, capital and total factor productivity (TFP). In this brief we will try to figure out what their expected dynamics are and how much each of them can contribute to economic growth in the foreseeable future.
In his new E-brief: "When will the global economy return to rapid growth?" CASE Fellow, Marek Dabrowski, provides a strong message in favor of intensifying the policy reforms at the global and national levels that were stalled by the perception of relative prosperity in the mid-2000s and the accompanying political opportunism, and calls for realism in macroeconomic projections. He argues that instead of monetary and fiscal policy fine-tuning, policymakers’ efforts should focus on removing structural and institutional bottlenecks to economic growth in the medium and long-term perspectives. According to prof. Dabrowski, in the case of AE, these are the consequences of negative population growth and its aging, labor market rigidities, the excessive burden of the welfare state, and the resulting, high, distortive taxes and sovereign over-indebtedness. In EMDE, the main challenge is related to poor business climate, which has its roots in governance failures and associated phenomena such as pervasive corruption, state capture, deficit of rule of law and organized crime. Poor technical infrastructure, insufficient human capital, financial underdevelopment and excessive public ownership are also relatively common obstacles to rapid economic growth. In addition, some EMDE suffer from trade protectionism, restrictions to foreign capital, macroeconomic populism, and excessive and poorly targeted welfare programs.
In the view of prof. Dabrowski, at the global level it is important not only to complete the Doha Round but also to resist protectionist pressures in the trade, financial and the migration policies of individual countries. The free flow of goods, services, capital and, to the extent possible, labor, is vitally important for the enhancement of TFP and the elimination of regional mismatches between the supply of labor resources and savings and the demand for them.
The full text of the E-brief is available here.
