View: For emerging countries like India 5% is the new 7%, the reasonable standard for growth
No major country is growing as fast today as it was last decade. Not one is growing faster than 10%.
Just about every year for a decade, the world has been seized by bouts of despondency over slumping economic growth. Last week came the latest such episode, amid signs that trade wars are slamming growth in the major economies and threatening a worldwide recession.
This story is, however, bigger than the trade wars and President Donald Trump. The era of globalisation ended before he took office, as countries turned inwards after the financial crisis of 2008. Since then, the world economy has struggled to grow against the headwinds posed by Four Ds: deglobalisation of trade, depopulation as labour forces shrink, declining productivity, and a debt burden as high now as it was on the brink of the crisis.
No major country is growing as fast today as it was last decade. Not one is growing faster than 10%, the rate the Asian miracle economies sustained during the golden age between 1950 and 2007.
National discussions dwell on what must be done to revive growth, even though the slowdown is driven by global forces beyond any one government’s control. Instead of dooming ourselves to serial disappointment and fruitless stimulus campaigns to revive the growth rates of the postwar glory years, we all need to rethink our definition of economic success, and failure.
At least five major economies from Germany to Mexico are on the verge of recession, which is typically defined as two straight quarters of negative growth. But it’s not clear that definition still makes sense in countries with shrinking working age populations, which have increased in number from two to 46 in recent decades. They include Germany, Japan, Russia, China and many other major powers.
These are not minor declines. Projections for 2040 show China’s working age population falling by 114 million to around 900 million, Japan’s by 14 million to around 60 million. With a shrinking labour force, these economies will inevitably slow, and at times contract. To continue calling two negative quarters in a row a “recession” implies that this outcome is abnormal and unhealthy, but that will no longer be the case.
To avoid overreacting, the discussion needs to shift to measures that better capture satisfaction and contentment, like per capita income growth. In countries with shrinking populations, per capita incomes can continue to grow so long as the economy is shrinking less rapidly than the population.
This helps explain why for example Japan isn’t facing more social unrest. Its economy has grown much more slowly than the United States in this decade, but because the population is shrinking its per capita income has grown just as fast, around 1.5% per year.
Shrinking populations also help explain why unemployment is at or near multi-decade lows, even in countries like Germany and Japan where growth fears are high. Gainfully employed Germans and Japanese won’t really feel like their nations are in a slump until per capita GDP growth turns negative – which may prove to be a more useful way to think about recessions in this new era.
The definition of success also needs to change. Many emerging countries still aspire to the double-digit growth rates posted by the Asian miracle economies at the height of the postwar golden age, when populations and trade were still booming. But no nation had ever grown so fast before then, and as the population and trade surges recede, it’s not likely any nation can repeat their feat.
The fact that the world’s total debt is now more than three times its economic output, and productivity growth has fallen sharply across the board as well, lower the likelihood of miracles even further.
The global economy has slowed from its postwar average of nearly 4% to below 3%. As it down shifts, even minor miracles are disappearing. Before this decade it was common for one in every five economies to be growing at 7% or better in any year. Now, among the world’s 200 economies, just eight or one in 25 are on track to grow 7% this year. Most of those are small economies in Africa.
Alarm bells rang this week on reports that China had slowed to a new low, just above 6%. The reality is that economies rarely grow as fast as 6% if the population is not booming too. Not only did China’s population growth turn negative in 2015, but it is one of the countries hardest hit by slumping trade, declining productivity and heavy debts. If China is really growing at 6% in this environment it would be a call for celebration not alarm.
Every country needs to rethink its definition of success. The benchmark for rapid growth should come down to 1-2% for developed economies such as the United States, and to 3-4% for middle income countries such as China. For emerging nations such as India, 5% is the new 7%, the appropriate aspirational standard.
This rethink is overdue. The number of countries with shrinking working age populations is expected to rise from 46 to 67 by 2040, and the decline in productivity growth is in many ways reinforced by the world’s heavy debts and rising trade barriers. Redefining the standard of economic success could help cure many countries of irrational anxieties about ‘slow’ growth, and make the world a calmer place.
(The writer is an author and global investor. © 2019 The New York Times distributed by The New York Times Syndicate)