Lost Decades

Some reflections from Yves and Ronnie Chan on the economies of the next decade. While I'm not sure I would call it a 'crisis of capitalism' I do think that the next decade may prove that the last one was an unsustainable pattern of growth. Essentially, real per capita economic growth is driven by increasing productivity -- and productivity is a difficult thing to sustainably increase at a very rapid rate because it depends on a whole host of factors. It depends factories and industrialization, but also on political and financial institutions and technological innovations that overcomes commodity bottlenecks. It strikes me that these institutions are some of the slowest things to change, and that when they become bottlenecks in the process, you can see extended periods of slow growth.

What has happened in the last decade is unsustainable precisely because a lot of the emerging world, and particularly China, hasn't even tried to develop these institutions -- they've been borrowing the more developed ones from the US and Europe. Export led growth in China implies more than simply rapid industrialization that takes workers out of the rice paddy and puts them in a factory stamping out plastic golf cups. That process can move quickly, as fast as you can build the factories and fill them with workers and ship the stuff to someone ready to buy it. The gains are dramatic precisely because you've reduced the equation of growth to just one factor, pinning everything the dramatic difference between subsistence agriculture and factory production. But that's not sustainable unless you also develop some way to sell the stuff, some way to manage the reinvestment of the profits, some way to control the rapid urbanization and industrialization. The Chinese have outsourced this to the US just as the US let the Chinese become their producer of last resort.

This symbiotic relationship is unstable, but sustainable at least for a while by the US accepting the role of consumer of last resort and allowing itself to go deeper and deeper into debt. The US already had the consumer and financial infrastructure in place to be able to grow its consumption at any given pace -- it was just a matter of printing more money and getting people to go out and spend it. The bottleneck was in how fast China could produce more stuff. This cycle has now ended because there is simply a limit to how in debt the rest of the world is willing to let you go. Now the bottleneck in growth shifts to how quickly you can get new raw materials -- commodity investment and new technology -- but also to developing consumer and financial infrastructure in other places. The first one has gotten a lot of press, but in fact is the easier part to deal with. Commodities have always been cyclical and always will be. Increasing production there happens on a relatively quick time scale though, something like 3-5 years. Changing institutions, as the post points out, is not at all so easy or so quick. Building democracies, financial systems, physical infrastructure, etc ... is much harder than building a factory. There is a whole global social machine that has become saturated, and that is what may take a decade to cure. The capitalist axiomatic rides again.