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The author is President of Queens’ College, Cambridge and an advisor to Allianz and Gramercy.
For the first time in two decades, I am optimistic that the economies of advanced countries will be able to decisively break out of a low-growth rut.
For too long, insufficient growth has undermined economic well-being, structurally weakened increasingly fragile public finances, worsened inequality and made it difficult to address global threats to lives and livelihoods, such as climate change and pandemics.
The roots of this problem go back to the beginning of this century. Instead of focusing on structural reforms that would improve productivity, too many countries became enamored of financial services as a shortcut to growth. Some even acted as if finance provided the next stage of capitalist development: agriculture, industry, services, and now finance.
It was a romance in which regulators opted for “soft-touch” strategies and countries competed fiercely to become international financial centres. There was little concern about the decoupling of an ever-expanding financial sector from the economies it was supposed to serve – that is, until it became unsustainable and culminated in the global financial crisis.
Rather than treating the crisis as evidence of structural failures, too many policymakers opted for a cyclical response (or the third T of the “timely, targeted, and temporary” policy mantra). In the absence of renewed drivers of growth, fiscal deficits and central bank balance sheets grew larger than anyone had imagined. Meanwhile, measures to strengthen productivity were at best fragmented, inconsistent, and lacking a strategic framework.
Having suffered the consequences, an increasing number of governments are putting growth at the top of the political agenda. This is illustrated most vividly by the UK government’s new initiative:growth mission” and the urgent implementation of measures to “release the brakes.” A renewed US administration is likely to follow suit.
This development is only one of the reasons why I am more optimistic about medium-term growth. The other is the realization that the lifting of the brakes must be accompanied by the emergence of new and powerful engines of the future. growth; and there is enough scientific evidence to suggest that such engines are not only possible but probable.
Every year, more impressive innovations emerge in areas such as artificial intelligence, life sciences, and sustainable energy. Each improves not only “what” we do, but also “how” we do it. The trend is being driven by abundant private sector funding, considerable human expertise, and growing computing power.
Alongside these enabling factors, there are other sources of potential growth arising from the restructuring of specific sectors, which generate beneficial spillover effects for the broader economy. This is the case in healthcare, food security and defence, where there is significant scope for direct and indirect productivity gains.
This optimism is not without its challenges. Every new growth driver comes with what I call 80/20 attributes: an 80% potential positive impact, but also a 20% chance of negative consequences. The challenge is to unlock the promising benefits while also managing the risk. In different countries, behavioural contexts will skew this. In the US, for example, innovators might tend to focus exclusively on the 80% potential benefits. In Europe, regulators might be paralysed by the 20% risk.
There is also the challenge of avoiding repeating globalization’s mistake of losing sight of the distributional consequences. The potential of these innovations to augment labor, rather than the risk of labor displacement, needs to be highlighted early and sustained. Visionary leadership will play an essential role in this regard, as well as in navigating a fragmented world in which the potential for win-win cooperation has given way to divergence and fragmentation.
However, the challenges, real as they are, are not enough to dampen my optimism. The potential for spectacular growth is real and promising.
For years, I have been concerned that my generation was leaving our children a world of insufficient growth, terrible inequality, failing public services, high debt and a damaged planet. Today, I am more hopeful that they will have powerful new tools to overcome this terrible legacy and enable their children to live in a more prosperous, sustainable and equal world.