International Economics

Topics: Economics, Unemployment, Economy Pages: 7 (1882 words) Published: December 1, 2012

How to grow | The Economist

Special  report:  The  world  economy In  this  special  report How  to  grow Withdrawal  symptoms The  cost  of  repair From  hoarding  to  hiring Pass  and  move Smart  work A  better  way Sources  &  acknowledgementsReprints

How  to  grow

Without  faster  growth  the  rich  world’s  economies  will  be  stuck. But  what  can  be  done  to  achieve  it?  Our  economics  team  sets out  the  options Oct  7th  2010  |  from  the  print  edition

WHAT  will  tomorrow's  historians  see  as  the  defining  economic  trend  of  the early  21st  century?  There  are  plenty  of  potential  candidates,  from  the remaking  of  finance  in  the  wake  of  the  crash  of  2008  to  the  explosion  of sovereign  debt.  But  the  list  will  almost  certainly  be  topped  by  the  dramatic 1/6


How to grow | The Economist

shift  in  global  economic  heft. Ten  years  ago  rich  countries  dominated  the  world  economy,  contributing around  two-­thirds  of  global  GDP  after  allowing  for  differences  in  purchasing power.  Since  then  that  share  has  fallen  to  just  over  half.  In  another  decade  it could  be  down  to  40%.  The  bulk  of  global  output  will  be  produced  in  the emerging  world. The  pace  of  the  shift  testifies  to  these  countries'  success.  Thanks  to globalisation  and  good  policies,  virtually  all  developing  countries  are  catching up  with  their  richer  peers.  In  2002-­08  more  than  85%  of  developing economies  grew  faster  than  America's,  compared  with  less  than  a  third between  1960  and  2000,  and  virtually  none  in  the  century  before  that. This  “rise  of  the  rest”  is  a  remarkable  achievement,  bringing  with  it unprecedented  improvements  in  living  standards  for  the  majority  of  people  on the  planet.  But  there  is  another,  less  happy,  explanation  for  the  rapid  shift  in the  global  centre  of  economic  gravity:  the  lack  of  growth  in  the  big  rich economies  of  America,  western  Europe  and  Japan.  That  will  be  the  focus  of this  special  report. The  next  few  years  could  be  defined  as  much by  the  stagnation  of  the  West  as  by  the emergence  of  the  rest,  for  three  main  reasons. The  first  is  the  sheer  scale  of  the  recession  of 2008-­09  and  the  weakness  of  the  subsequent recovery.  For  the  advanced  economies  as  a whole,  the  slump  that  followed  the  global financial  crisis  was  by  far  the  deepest  since the  1930s.  It  has  left  an  unprecedented degree  of  unemployed  workers  and  underused factories  in  its  wake.  Although  output  stopped shrinking  in  most  countries  a  year  ago,  the recovery  is  proving  too  weak  to  put  that  idle capacity  back  to  work  quickly  (see  chart  1). The  OECD,  the  Paris-­based  organisation  that tracks  advanced  economies,  does  not  expect this  “output  gap”  to  close  until  2015. The  second  reason  to  worry  about  stagnation  has  to  do  with  slowing  supply. The  level  of  demand  determines  whether  economies  run  above  or  below  their “trend”  rate  of  growth,  but  that  trend  rate  itself  depends  on  the  supply  of workers  and  their  productivity.  That  productivity  in  turn  depends  on  the  rate 2/6


How to grow | The Economist

of  capital  investment  and  the  pace  of  innovation.  Across  the  rich  world  the supply  of  workers  is  about  to  slow  as  the  number  of  pensioners  rises.  In western  Europe  the  change  will  be  especially  marked.  Over  the  coming  decade the  region's  working-­age  population,  which  until  now  has  been  rising  slowly, will  shrink  by  some  0.3%  a  year.  In  Japan,  where  the  pool  of  potential workers  is  already  shrinking,  the  pace  of  decline  will  more...
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