The United Kingdom’s planned exit from the European Union is impending, and the North American Free Trade Agreement, or NAFTA, has been reformulated as the “US-Mexico-Canada-Agreement” by the current US administration - which sharply criticized the World Trade Organization while blocking the re-appointment of a WTO body member in late 2018.
The United Nations sought to provide a framework for this, by putting forward Sustainable Development Goals in 2015 that include eliminating poverty and making cities inclusive and safe. Subsequent progress reports have found that while satisfactory progress had been made on some goals in some regions, insufficient progress had been made on others.
These dynamics raise serious questions about the future ability of global institutions, already widely panned by those who feel they have been neglected, to provide assistance to those very same people - by coordinating improved international economic cooperation for the greater good.
Too many people have been left behind by globalization, creating increased polarization.
Global trade was growing at a rate of 8% annually before the 2008 financial crisis; post-recovery, it has slowed significantly. Annual merchandise trade volume increased by just 3% in 2018, and is expected to slow further to 2.6% in 2019, according to the World Trade Organization. Meanwhile nationalist backlash in a number of countries has made global economic governance more difficult and uncertain.
According to the International Monetary Fund, more than half of the countries in the world have seen an increase in income inequality over the past three decades. While income distribution systems are severely under-performing due to neglect, this is not an inevitable result of capitalism. The insufficient attention paid to those denied the benefits of globalization has contributed to the weakening of the very political consensus that long supported it.
Even in countries that have benefited from globalization, too many have been left behind. The US, for example, has successfully leveraged international trade and found countless overseas markets for its goods, while at the same many of the jobs producing those goods have moved to other countries. The number of manufacturing jobs in the US fell to less than 11.5 million by 2010, from 19.4 million in 1979, according to a report published by the Pew Research Center in 2017. The US is not alone; while global trade has helped to reduce inequality among countries, within countries inequality is increasingly problematic.
Inclusive Growth
While a relatively recent slowdown in global productivity has contributed to the reduction of the real value of salaries, other forces are also at work - such as rapid technological change, evolving market structures, and globalization, all of which began impacting distribution patterns even before the productivity slowdown.
A failure to improve living standards and reduce inequality has worsened social divides.
As a result, levels of social inclusion have either deteriorated or remained unchanged in 20 of 29 advanced economies around the world over the past five years, according to the WEF’s Inclusive Development Index 2018. According to the index, which measured 103 countries’ economic performance using several dimensions in addition to GDP, the advanced economies surveyed failed to collectively increase inclusion (measured by median household income, poverty, and wealth and income inequality) during the past five years, even as they increased their average “growth and development” score by more than 3%.
Even as global labour productivity grew by 74% between 1973 and 2013, worker compensation grew by just 12.5% over the same period, according to the Economic Policy Institute.
Statistics like these have led to the emergence of a global consensus on the need for a more inclusive, sustainable model of growth and development. Enhancing inclusiveness is a long-term process, which requires long-lasting commitments among stakeholders including governments, businesses, and civil society organizations in order to mobilize resources and effort. Policy-makers need to place people and their standard of living at the centre of their strategies.
World Bank research suggests that the economies that manage to achieve relatively good standards of inclusive growth also tend to adopt land reforms, actively support small- and medium-sized businesses, invest generously in education, and insulate policy-making from corruption. However, despite the consensus on a need for more inclusive growth, little in the way of concrete policy guidance has emerged.
Greater multi-stakeholder efforts are therefore needed in order to create effective economic institutions, and to develop incentives that support growth and productivity. Investment in education and income redistribution mechanisms, for example, can help to bridge the opportunity gap between rich and poor - though they will not be solely sufficient to achieve a more sustainable model. This will require a deeper rethinking of business models and public policy.
Economics and the Fourth Industrial Revolution
Technologies are quickly developing and merging, testing traditional means of economic growth.
Meanwhile companies in countries including China and Japan are developing robotic exoskeletons designed to boost worker productivity. On the one hand, such devices could help address the problem of ageing workforces (particularly in countries with demographics like Japan’s), by keeping more workers on the job for more years than they would be able to manage otherwise. On the other hand, greater automation via robotics may also add further downward pressure on wages earned by low-skilled workers. Leveraging the potential benefits of technology in the interest of more inclusive growth will require active preparation for possible future economic and social repercussions – such as increased unemployment, and the widespread failure of overwhelmed welfare systems.
Responses to technological change can determine the shape of economic progress.
Technology that can serve to automate tasks now performed by significant portions of a country’s existing workforce, for example, can potentially do at least as much damage to the social fabric as the good it can do for productivity metrics.
According to a report published by the McKinsey Global Institute in 2017, as much as 14% of the global workforce will need to switch occupational category by the year 2030 as a result of increasing automation. In addition, according to the report, all workers will have to adapt as their occupations evolve alongside increasingly capable machines, by attaining a higher level of education or by spending more time on honing the human aspects most difficult to automate - like creativity, and emotional skills.
The Fourth Industrial Revolution presents a turning point for human development, as the rapid pace of technological change tests social cohesion, and demands bold policy responses in order to better foster innovation, develop sound economic policy, and prudently increase productivity.
According to market-research firm Gartner, the total number of connected devices is expected to more than double between 2017 and 2020, reaching 20.4 billion. New technologies can help generate economic growth; the Internet of Things, which strings together myriad, everyday devices with online connectivity, can for example help cities more efficiently use power needed to light streetlamps, by sensing when they are really needed and when they are not (Barcelona is an example of a city deploying the technology for this purpose).
Taxation and Sustainable Growth
Progressive taxation can address inequality, though fiscal spending priorities vary widely among countries. A country’s priorities, fiscal policies, and ways that its government collects taxes and spends public resources can all play major roles in boosting sustainable development, reducing poverty, and addressing inequality. However, priorities vary significantly from country to country.
Government-funded social safety nets can mitigate the effects of external economic shocks, and help the chronically poor benefit from growth. For the most vulnerable groups of people with no other means of adequate support, such as single-parent households and the disabled, cash transfers can be a viable option. One example of a cash transfer program, in Zambia, was cited by the Food and Agriculture Organization of the United Nations for reducing extreme poverty by reaching about 150,000 households between 2003 and 2014.
In its World Economic Outlook published in late 2018, the International Monetary Fund noted that a recent US tax overhaul was likely to widen the country’s fiscal deficit - which had already been under pressure due to spending on support for the country’s ageing population (a subsequent edition of the report in 2019 suggested that this deficit expansion would subside after 2020).
While deficit expansion provides a short-term boost to economic activity in the US, according to the IMF, it has also piled onto already-unsustainable public debt, and creates elevated risk not only for the US economy but for other global economies as well. In August 2019, the US Congressional Budget Office projected that the country’s deficit would hit $960 billion that fiscal year, and average $1.2 trillion in each of the next 10 years. This fiscal pressure comes as the US administration has signaled that it would like to move ahead with long-planned, significant spending on infrastructure.
While France spent the equivalent of 31.5% of its GDP on social spending (defined as resources redistributed to low-income households, the elderly, the young, the unemployed, the disabled, or the sick) in 2016, South Korea spent the equivalent of 10.4%, according to data published by the Organization for Economic Co-operation and Development; the OECD spending average for 2016 was 21% of GDP, while the figure for the US was the equivalent of 19.3% of GDP. Taxation can provide a means of directly addressing market inequalities, as long as it is designed to minimize loopholes, ensures a progressive system where high earners pay a larger share, and provides for funding to reach those most in need without dampening their incentive to work.
Economics of Environmental Sustainability
Climate change and rising temperatures promise to severely hinder production and health. According to an edition of the International Monetary Fund’s World Economic Outlook published in 2017, the per capita GDP in a typical low-income country will be 9% lower by 2100 than it would have been in the absence of climate change-related temperature increases. A subsequent edition of the outlook published in late 2018 noted that robust global economic growth will require better buffering low-income countries against the effects of climate change, with things like climate-smart infrastructure.
In late 2018, the UN’s Intergovernmental Panel on Climate Change issued an alarming report noting that global temperatures are on track to be 1.5°C higher than the preindustrial era as soon as 2030. Currently, at 1°C warmer than the preindustrial era, we are already experiencing severe consequences of climate change including forest fires in the Arctic, and the increased intensity of hurricanes. A 1.5°C increase would mean more rapid sea level rise, hot extremes in most inhabited parts of the world, a higher probability of drought, and other risks to human security and economic growth, according to the UN report. Climate change, pollution, and resource depletion have been impacting the economic productivity of both countries and private companies. These forces also disproportionately impact the poor, exacerbating socio-economic inequality.
Agriculture and farming in the oceans also face significant climate-related challenges. Climate change-related changes in marine fisheries production may be just as large as those in crop agriculture, according to a report published by the Food and Agriculture Organization of the United Nations in 2018; primary production of the global ocean is expected to decline by 6% by 2100 (and by 11% in tropical zones), according to the report. Economic policies and business practices need to better take environmental constraints into account, in order to make stable growth and freedom from conflict realistic possibilities for future generations.
While weather shocks tied to climate change have an immediate impact on agricultural production, they also have broader impacts related to labor productivity, mortality, health, and conflict - as threats to food security aggravate already-simmering issues in fragile states. According to IMF calculations, a temperature increase of 1°C to the median, low-income developing country temperature of 25°C can reduce crop production and agriculture value added (the processing of raw materials) by between 1% and 2% annually.
Productivity and Competitiveness
Productivity is difficult to measure, but essential for increasing prosperity.
In order to help reset the post-pandemic global economy in a healthy, inclusive manner, governments need to consider new ways to monitor the evolution of their productivity - which is complex, and tends to be difficult to directly measure. The advent of the Fourth Industrial Revolution and associated technology developments have altered traditional aspects of productivity and their relative importance to economic development, only making accurate measurement even more difficult.
In June 2020, the International Monetary Fund reported that a hit to productivity as surviving businesses ramp up COVID-19-related workplace safety practices was likely to contribute to a 4.9% global economic decline for the year. Even prior to the pandemic, increased trade barriers and geopolitical tensions had threatened to take a toll on productivity growth by disrupting supply chains - creating financial vulnerabilities that could be amplified during the next downturn.
As former US president Barack Obama put it: without a faster-growing economy, it is impossible to generate the wage gains people want - regardless of how wealth is divided.
Productivity levels are a key reason why different countries enjoy different degrees of prosperity; the world’s most competitive economies, such as the US and Germany, are several times more productive than large developing countries like Nigeria, according to data published by the Conference Board. This at least partly explains why US GDP per capita is over $60,000, and Nigeria’s is about $6,000. When productivity levels reach a certain depth, there is simply not enough income to properly distribute.
ECONOMIC PROGRESS
Global economic progress is faltering. The uncertainty caused by the COVID-19 pandemic, technologies associated with the Fourth Industrial Revolution, dramatic shifts in international trade, and political upheaval have left many disillusioned - and triggered social tension, worsened inequality, and a more urgent need to foster cooperation. Stakeholder capitalism, designed to benefit all stakeholders and the environment rather than just shareholders, could be a means to achieve better global health, greater sustainability, more inclusive development, and revived productivity growth.
According to the World Economic Outlook 2022 By International Monetary Fund war sets back the global recovery
For developing countries already drowning in debt, this is a recipe for defaults and prolonged economic distress. In this fragile and uneven period of global recovery, the World Economic Situation and Prospects Report calls for better targeted and coordinated policy and financial measures at the national and international levels.
