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The author is President of Queen’s College, Cambridge and an advisor to Allianz and Gramercy.
I am optimistic that, for the first time in 20 years, advanced economies can decisively break out of their slow-growth slump.
For too long, insufficient growth has undermined economic health, weakened increasingly fragile structural finances, exacerbated inequalities, and made it harder 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, when instead of focusing on structural reforms that would increase productivity, too many countries became obsessed with financial services as a shortcut to growth. Some even acted as if finance would provide the next stage of capitalist development: agriculture, industry, services, and now finance.
It was a romance where regulators opted for a “light touch” approach, countries competed fiercely to become international financial centres, and there was little concern about an ever-expanding financial sector becoming detached from the economies it was meant to serve – until that became unsustainable and we descended into the global financial crisis.
Rather than treating the crisis as evidence of structural flaws, too many policymakers opted for a cyclical response, the third T of the mantra of the time: “timely, targeted and temporary” policy approaches. With growth drivers unrenewed, fiscal deficits and central bank balance sheets expanded to scales no one had imagined. Meanwhile, measures to bolster productivity were piecemeal and incoherent at best, and lacked a strategic framework.
Having suffered the consequences, a growing number of governments are putting growth at the top of their policy agendas, most vividly illustrated by the new UK government’s “mission for growth” and the implementation of emergency measures to “release the brakes”. The new US administration is likely to follow suit.
This shift is only part of the reason why I am more optimistic about medium-term growth. Another reason is the recognition that releasing the brakes must be accompanied by the emergence of a powerful new engine for tomorrow’s growth. And there is ample scientific evidence to suggest that such an engine is not only possible, but likely to come about.
Every year, incredible innovations emerge in fields like artificial intelligence, life sciences, and sustainable energy. Each innovation improves not just what we do, but how we do it. This trend is fueled by abundant private sector funding, human expertise, and expanding computer power.
In addition to these drivers, there are also potential sources of growth from the restructuring of certain sectors, creating beneficial “spillovers” across the economy. This is the case for health care, food security and defense, where there is significant scope for direct and indirect productivity gains.
This optimism is not without challenges. New growth drivers have what I call an “80/20” characteristic: 80% of the potential impact is positive, but there is also a 20% chance of a negative outcome. The challenge is to unlock the promising benefits while managing the risks. This will vary from country to country and from one operating context to the next. In the US, for example, innovators may tend to focus only on the 80% potential benefits. In Europe, regulators may be bogged down by the 20% risk.
There is also the challenge of not repeating the mistake of losing sight of the distributional consequences of globalization. We need early and sustained emphasis on the workforce-augmenting potential of these innovations, rather than their workforce-shortaging risks. Visionary leadership will play a key role here, and in navigating a fragmented world where possibilities for win-win cooperation have been replaced by division and fragmentation.
But while the challenges are real, they are not enough to dampen my optimism: the potential for exponential growth is real and promising.
For many years I have worried that our generation would leave our children a world of inadequate growth, terrible inequality, broken public services, high debt, and a scarred planet. Today I am more hopeful that we have powerful new tools to overcome this terrible legacy and ensure our children live in a more prosperous, sustainable and equal world.
