By TT Ram Mohan
World economic growth in 2016 will be poorer than thought earlier. Ditto in 2017-so says the IMF.
In terms of market values, world output will grow at 2.4% in 2016, growth of around 3% is considered modest. Is this a short-term thing or does it presage a long-term trend?
Many economists think it’s the latter. The world is entering a period of low growth – what IMF Managing Director Christian Lagarde calls the ‘new mediocre’. Why is the world sliding into a low growth era. There are several competing hyptheses:
- Secular stagnation: This is a term coined by Alvin Hansen, an economist, in the 1930s. It has been resurrected of late by Larry Summers. The basic idea is that demand for goods is declining for a number of reasons. One is low population growth in the developed world. Another is that modern industry is less capital intensive and hence demand for investment goods is lower per unit of output than before-consider that Facebook is worth billions in market cap while employing a fraction of what GM or GE employ. Thirdly, inequality is rising. This means the rich appropriate more and more of incremental income. They can consume only so much, so spending is impacted and so is investment. We have high savings and low investment, which is what explains why real interest rates are so low today.
- Liquidity trap: This is Krugman’s view and it’s a variant on the above. Monetary policy is ineffective at the low interest rates we have today and hence can’t do much to stimulate output.
- Falling productivity: Richard Gordon argues that economic growth is simply population growth multiplied by productivity growth. Both are falling. So, we have to accept that growth will be low in the years to come.
- Debt overhang: This is the view propounded by economists Rogoff and Reinhart. There’s excess debt in the world economy following the financial crisis. Coming out of the debt overhang typically takes very long.
Now, if you accept any of the above, it means that it’s futile for policies to push growth (although Summers think that public spending on infrastructure in the developed world can still make a difference).
The IMF in, its latest World Economic Outlook, seems to think that current growth rates represent policy failures – too much reliance on monetary policy and too little on fiscal policy and structural reforms. A combination of these along with moves to put life into banking systems in the Eurozone and elsewhere could make a difference.
I doubt that the political will exists for the purpose. I also believe that geo-political risks are pretty high, given the return of the Cold War. So, we’re going to be stuck with the ‘new mediocre’ for a while. That’s bad news for those hoping for a return to 8 per cent plus growth rates in India.
TT Ram Mohan is the Professor of Finance and Accounting Area, Indian Institute of Management Ahmedabad.
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