HOW TO RELEASE THE NEXT BOOM / THE FINANCIAL TIMES COMMENTARY & ANALYSIS

How to release the next boom

By George Magnus

Published: August 13 2009 21:41

In hard times, there is always an economic melancholy about the future. Yet, the periods after the two world wars of the 20th century, the inflationary 1970s, and the Asia and emerging markets crises of 1997-2000 were hardly disappointing. Today, despite some signs of financial and economic stabilisation, most economists expect economic growth over the next few years to be confined to a straitjacket. Could the current consensus about secular stagnation be wrong again?

Economic growth depends on the continuous discovery and expansion of markets, arising, for example, from a growing labour force and lower barriers to trade and capital movements and the interplay between capital investment and technological change. The unexpected boom of the 1920s witnessed a surge in output, manufacturing and productivity, the spread of mass production, and the development of household goods, not to mention a speculative real estate boom in the US that began in Florida, and the nefarious antics of one Charles Ponzi. After 1945, expectations of economic stagnation endured into the 1960s, in spite of more or less continuous expansion that was based on reconstruction, the reduction in trade barriers, a highly elastic labour supply, stronger educational attainment and rapid technological progress.

Today, we feel glum about economic prospects for all the normal reasons, but the most worrisome may be because the crisis has reminded us that we are losing two of the key growth drivers of the last 25 years.

Leverage will be restrained by impaired supply of credit and the repayment or restructuring of debt will have to go much further before private demand for credit expands significantly again. Restoring a viable banking system and unravelling the debt burden, first of households and then of governments, will weigh on the economy for several years.

Meanwhile, the crisis and its impact on pension plans have focused attention on the baby boomers, typically 20-25 per cent of the populations of western economies, who are now starting to head off into retirement. Since the boomers, and baby boomer women especially, were the backbone of the economic expansion of the last 25 years, we may lose a growth driver of great significance. Expected changes in the numbers of people of working age and of those over 65 underlie a unique shift in age structure that may result in weaker economic growth and growing financial stress for individuals and the state.

In spite of the economic implications of a more restrained credit environment and of rapid ageing, it would be as myopic to presume that our destiny is secular economic decline as it would be to believe that, in time, we will revert to the status quo ante. There are new growth drivers, but they need to be managed or facilitated.

Market size will probably continue to expand naturally in emerging markets. Some assertions that China’s economy will surpass the US within 10-15 years seem wide of the mark, but continued catch-up by China and other big emerging markets is hardly in doubt. Their share of world trade will expand, and the poorest countries will benefit if progress is ever made in lowering obstacles to agricultural trade. It is imperative, therefore, that strong and respected institutions accommodate the needs and interests of advanced and emerging economies.

The pressure on labour supply can be alleviated by strategies to raise the participation in the labour force of the two groups that are under-represented, namely, the over-55s and women.

This is likely to involve extended working lives, changes in the organisation of work, more affordable childcare and family-friendly policies at work. Several large companies are already starting to explore the possibilities. The quality and productivity of the labour supply can be improved greatly by strengthening the education system, including universities, and by developing and expanding learning programmes throughout working lives.

Technological change may redefine the boundaries of future economic growth much as information technology has in the last 20 years. New IT applications are likely to augment production, design and the dissemination of information.

Advances in materials will improve electronics, transport, energy systems and medicine. Genetic engineering is expected to lead to new products and processes in medicine, food production, plastics, chemicals and fuels. Nanotechnologies that build products more cheaply and precisely from individual atoms and molecules, could potentially revolutionise automation and robotics; and the fusion of nano, IT and genetic sciences could be as significant as any innovation so far.

Investors will have to use their judgment to identify winners and losers, but new growth drivers will emerge unless we act to suppress them. A better globalisation, in which emerging and advanced nations’ interests can be accommodated with appropriate compromises on all sides, will require effective national and international institutions. Demographic change can be offset through labour market and education policies. New production and work processes will require investment in infrastructure, more inclusive labour markets, possible changes to legal practices and improvements in training and education.

However hard times are, no one should imagine that economic melancholy is pre-ordained. The tricky part is where we come down in the “government versus markets” debate, now that the latter is in the dock. We have Big Government now, whether we like it or not, but the acid test will be if, in addition to picking up the pieces of the last boom, governments can help release the next one.

The writer is senior economic adviser, UBS Investment Bank, and author of ‘The Age of Aging: How Demographics are Changing the Global Economy and Our World’

Copyright The Financial Times Limited 2009