Views

Worries beyond good economic news

Debt levels, decline in productivity growth, and income and wealth inequality are issues lurking behind positive indicators

As 2018 begins, things are looking up for the global economy.

Over the last six months, growth projections by official institutions such as the International Monetary Fund (IMF) have been adjusted upward.

But not all of the news is good.

To be sure, there are plenty of positive indicators to inspire optimism.

The eurozone Purchasing Managers' Index for manufacturing hit an all-time high last month, and even Greece's economy is finally growing.

In the United States, growth now appears likely to exceed the IMF's October prediction of 2.3 per cent for this year.

In the emerging world, China seems to have staved off the risk of a sharp slowdown.

Turkey posted 11 per cent growth in the third quarter of last year. Even Brazil, which experienced negative growth in 2016, is likely to exceed the IMF's forecast of 1.5 per cent growth this year.

While individual countries show different levels of inequality, its rise has been evident almost everywhere, with income and wealth increasingly concentrated at the very top.

As the real economy strengthens, equity values are increasingly being validated. The Financial Times Stock Exchange All-World Index rose by nearly 22 per cent last year - its best performance since the post-crisis rebound of 2009.

Yet, there are potential causes for concern - one of which relates to debt levels.

With the advanced economies no longer needing to maintain extraordinary monetary policies, nominal interest rates are set to climb from their current historic lows. As that happens, high debt levels could become problematic, impeding growth by triggering disorderly deleveraging.

That said, given low inflation, there is little reason to expect interest rates to rise sharply, and gradual monetary policy normalisation would not necessarily have negative effects on growth or inflation.

But there is another potential obstacle in the path of sustained recovery: The long-term decline in productivity growth has not yet been reversed.

Instead, the current boom seems to be demand-led, with private consumption being the biggest driver, though private investment, too, is finally starting to rise.

These trends have been accompanied by solid employment growth, which is welcome news but cannot last forever.

In the longer run, economic performance and potential growth will depend on the supply side and, in particular, on a revival of productivity growth.

Techno-optimists claim that technology will fuel the needed gains, as the lag between digital capabilities and their applications in the economy shortens.

What is not really up for debate is that inequality within countries is rising fast.

While individual countries show different levels of inequality, its rise has been evident almost everywhere, with income and wealth increasingly concentrated at the very top.

This trend will accelerate as new technologies, regardless of how much productivity growth they generate, continue to increase the skill premium, shift income to frontier firms and allow new types of near-monopoly, "winner-take-all" positions to develop on a global scale.

Herein lies the biggest danger in today's exuberant headlines about growth.

Many believe that rapid growth can act as a virtual panacea for countries' political and social woes, including the rise of populism and nationalism.

But if the benefits of rapid growth accrue to the top 5 per cent or 1 per cent, social tensions are bound to rise. And the fact is it will be difficult to develop policies that can reverse damaging political trends and promote more widely shared growth.

This is not to say that nothing can be done.

TRULY INCLUSIVE

On the contrary, devising solutions should be a high priority, with the policy debate centring on measures that would help to create truly inclusive economies.

One such measure would be broad-based access to affordable and quality education, including skills upgrading and retraining. The development of regulatory frameworks that encourage competition would also help, as would limiting tax-base erosion.

Public research should be funded in a way that gives taxpayers a stake in profitable outcomes. Likewise, infrastructure investments should have explicit equity-related objectives.

The goal should be to attack inequality on two fronts: Ensuring that pre-tax incomes rise in a more inclusive fashion and strengthening the equalising role of taxes and transfers.

Given the global nature of markets, many policies will require international cooperation to be effective.

With issues concerning international trade, investment, competition and intellectual property rights increasingly linked, global approaches that can address them in a holistic way have become vital.

Kemal Dervis is former minister of economic affairs of Turkey. Zia Qureshi is a former director of development economics at the World Bank. This article appeared in The Business Times on Jan 17.

BUSINESS & FINANCE