Michael Spence and David Brady write: How to improve economic performance at a time when political instability is impeding effective policymaking.
Brady shows the correlation between rising political instability and declining economic performance, pointing out that countries with below-average economic performance have experienced the most electoral volatility.
Over the last 15 years increasingly powerful digital technologies enabled the automation and disintermediation of “routine” white- and blue-collar jobs. With advances in robotics, materials, 3D printing, and artificial intelligence, one can reasonably expect the scope of “routine” jobs that can be automated to continue expanding.
The rise of digital technologies also boosted companies’ ability to manage complex multi-source global supply chains efficiently. The tradable sector as not generated much employment, at least not enough to offset declines in manufacturing. In the United States, for example, net employment generation in the third of the economy that produces tradable goods and services was essentially zero over the last two decades.
The share of national income going to labor, which rose in the early post-war period, began falling in the 1970s. While globalization and digital technologies have produced broad-based benefits, in the form of lower costs for goods and an expanded array of services, they have also fueled job and income polarization, with a declining share of middle-income jobs and a rising share of lower- and higher-income jobs splitting the income distribution. The magnitude of this polarization varies by country, owing to disparate social-security systems and policy responses.
Until 2008, when economic crisis roiled much of the world, the concerns associated with rising inequality were at least partly masked by higher leverage, with government expenditures and wealth effects from rising asset prices supporting household consumption and propping up growth and employment.
In the post-war industrial era, one could reasonably expect to earn a decent living, support a family, and contribute in a visible way to the country’s overall prosperity. Being shunted into the non-tradable service sector, with lower income and less job security, caused many to lose self-esteem, as well as fostering resentment toward the system that brought about the shift.
While technology-driven economic transformation is not new, it has never occurred as rapidly or on as large a scale as it has over the last 35 years, when it has been turbocharged by globalization. With their experiences and fortunes changing fast, many citizens now believe that powerful forces are operating outside the control of existing governance structures, insulated from policy intervention. And, to some extent, they are right.
The result is a widespread loss of confidence in government’s motivations, capabilities, and competence.
As Brady points out, during the more stable period immediately following World War II, growth patterns were largely benign from a distributional perspective, and political parties were largely organized around the interests of labor and capital, with an overlay of common interests created by the Cold War.
This has several economic consequences. One is policy-induced uncertainty, which, by most accounts, amounts to a major impediment to investment. Another is the distinct lack of consensus on an agenda to restore growth, reduce unemployment, reestablish a pattern of inclusiveness, and retain the benefits of global interconnectedness.
These trends may actually be healthy, as they bring concerns about globalization, structural transformation, and governance – which have so far been expressed mainly in the streets – into the political process.
When a developing country gets stuck in a no-growth equilibrium, building a consensus on a forward-looking vision for inclusive growth is always the critical first step toward achieving better economic performance and the policies that support it. .