Wednesday, September 21, 2016

ICYMI: Economic Growth Over The Very Long Run

I keep meaning to post on this topic, but what with work and all, it’s been on the back burner. In any case, I wrote an article published in the Star last week that covers the main points (excerpt):

Economic growth in an ageing world

MOST people take growth for granted. We expect living standards to increase over time and that our children will enjoy a better quality of life than us.

But growth is not a given and it is driven by economic processes that can and do change. There has been a gradual slowing in global growth over the past couple of decades, and some of this can be pinned on structural factors that form the very foundation of growth itself....

It’s partly secular stagnation, but more in the Hansen sense than in Summers new formulation, and over a larger scope than just what’s going on in developed economies.

Have a read and let me know what you think in the comments.

Dear God, I dearly hope I’m wrong on this.


  1. Great piece and very philosophical.

    My thoughts:

    1) Medical advancement since early 20th century has fueled the exponential population growth. The world's life expectancy improved from 34 years old in 1913 to the current 71 years old (it had been fluctuating between 30 to 40 in the past many centuries). However, we are reaching bottleneck in medical advancement -- super low infant mortality rate and most people die old -- so it's a progress that we should be happy for.

    2) While we can't do much on pushing up further the life expectancy rate, but we can control our fertility rate, which we shouldn't. Taking out water from the well without refilling it is a very irresponsible act of mankind. Elon Musk once said that giving birth is a social responsibility of every human being. I couldn't agree more, but saying is easier than doing.

    3) With life expectancy rate going up gently and fertility rate going down sharply, we are just building an old folks world. No one seems to be serious in addressing this problem although we already have our first white rat -- Japan.

    4) On education, I like to think that the value of obtaining a university degree is diminishing FAST, from ROI point of view (not supply and demand). Knowledge is vastly available nowadays at very low cost (see Khan Academy, Wikipedia and whatnot). Today, if I'm an entrepreneur who is seeking for human capital, I would incentivize some bright high-school graduates to skip college/university and work for me while undergoing some low-cost-but-equally-productive education thru information technology, and they'll become as productive as any degree holder. Personally, I've learned more knowledge in the past 3 years than the 10 years before (plus my time in uni) thanks to the vast availability of information. However, it's not easy to alter the general recruitment culture of enterprises, where they screen only degree-holding candidates. But I believe the world will slowly change due to the intense competition for human capital. Imagine if Google starts doing what I suggested, the world will revolutionize.

    5) Back to economic growth -- I still believe we have room to grow despite of the demographic problems. Our urbanization rate is not full yet, and we will have a new term of "smart" urbanization rate (smart cities) in the near future. The advancement of A.I. is coming, so productivity per capita will continue to go up albeit the transition is a bit complicated. Mankind will continue to progress, and I firmly believe that will be translated into economic growth.

    1. @Fung

      I agree with most of your points, especially point 4 (given what my wife does).

      On point 5, I absolutely agree, but just to illustrate what might happen:

      Japan's per capita growth is actually better than Europe, and not much less than the US. Yet headline growth has effectively been zero.

      So it's not necessarily impossible to have both increasing standards of living and declining growth. In fact that's what I'm basically arguing - headline growth will gradually drop globally, though living standards will continue to increase.

      This will have implications for macroeconomic policy, both fiscal and monetary.

    2. Hisham,

      TQ for your comment. Just curious, what does your wife do? Teacher?

      Yes, Warren Buffett (my idol) has been talking more about GDP per capita growth than GDP growth itself, which I think makes more sense from individual point of view. After all, our objective is to live a better life ourselves regardless of the overall macroeconomic progress.

      But your statement of "This will have implications for macroeconomic policy, both fiscal and monetary" is so simple yet so punching and hitting right to the point.

      So in order to boost the topline GDP growth, the policymakers should not only focus on GDP growth but also "capita" growth, right?

      But who should lead the capita-growth project? Finance ministry? Health ministry? Immigration? Or PMO? Doesn't seem like anyone is paying attention to it, or maybe there's no political incentive to do so.

      Well, our capita growth is 1.5%, still quite high compared to global standard, so it's not surprising that our policymakers have no sense of urgency yet. After all, due to the intense competition in politics, the politicians nowadays focus on only 3-5 years horizon, who cares about long term policy?

    3. @Fung

      My wife is a Professor at UKM, currently also a Deputy Director at their Centre for Learning and Teaching Technologies. Basically trying to get UKM out of the stone age.

      As far as what metric to use, I think "instead of" rather than "also".

      In any case, when we talk about GDP per capita, we are essentially talking about productivity growth. So the basic foundation is already there as far as policy action is concerned, it just needs the right metric to focus on.

      The biggest difference I think will really be on the monetary and financial side. We need to get used to the idea that a declining stock market, deflation, low interest rates, and low or zero headline growth are "ok".

    4. I'm supposed to be ok with declining stock market, deflation... etc., but when I think deeper, that will translate to low/no growth on my EPF money. It's psychologically disturbing, although the net effect of purchasing power is actually neutralised.

  2. Well the world has a pretty good track record in beating the Malthusian disaster scenario, over a century of out performance in fact.

    Philosophical questions first before we go into context:

    1) Isn't fertility (i.e. the decision to have any number of offspring) a human choice?
    2) Why do humans - globally - willingly reduce their fertility rate when they get richer? Is it some inherent instinct within us that drives us that makes us have fewer offspring we have the more future resources they have for themselves?
    3) Are we, as a species, at (or reaching) the peak of diminishing returns to labour?
    4) Do (labour) economic models make sense once, or if, cloning - or even better, the ability to clone human adults with temporary lifespans - becomes ethically acceptable?
    5) Are we as a species also at our peak with regards to sciences regarding human longevity or the ability to extend our productive or fertility age?
    6) If Malthus was right (i'm definitely not a proponent even though i find him interesting), what's the next big human event? If I recall he said something along the lines of war, famine, or something once we reach a population disaster.
    7) Would the world be sustainable now at fertility at 2.1 or do we have some more room to spare? What would that mean if there was an adverse global event?

    Ok questions to ponder with context,

    1) Historical perspective. Was the high and persistent fertility rates due to higher returns to labour (relative to capital) prior to the 20th century? Infant mortality was a lot higher too, which meant that the failure to produce another unit of labour was more significant. BUT: weren't landowners relatively far more better off then (compared to labour) than capital owners now? What has changed?

    2) With human longevity accelerating faster than man-mandated retirement ages, how should policymakers react (I'm guessing this is more closer to your heart) with regard to pension and healthcare costs? Will pensions globally become more aggressive in their portfolios eventually? The resultant implications to capital and liquidity flows will be something to watch.

    3) Immigration and global fertility. I'm not certain that having people move from one country to another will have a zero net impact on global fertility but I could be wrong here. Perception of more available infrastructure and less competition (or higher return to labour in Samuelson language) in the 'giver' country would still provide some support for fertility (well, not proven through any historical measure, but I'm more optimist -_-)

    Hmm, spent too long writing about this.
    Back to work :(

    1. @Jason

      Woah, a bit too much philosophy from me.

      Just a few notes:

      1. Income and fertility are being delinked. Fertility is dropping even in poor countries. I think availability of medical technology and drugs are reducing child mortality, which reduces the drive for reproduction to pass on your genes.

      2. On Malthus, you've got me backward. I'm not arguing that Malthus is right (population growth exceeding natural resources, causing a growth crisis). Quite the opposite - growth is declining because population growth itself is declining, not because we're running against growth constraints.

      On the other three issues:

      1. No idea. Worth exploring, especially differences based on income.

      2. Happening already (as far as costs are concerned). Watch this year's budget: some interesting things will be announced. On the investment side, we've been seeing the pressures over the past few years already. That's one reason for the general move towards equity versus fixed income investments on the one hand, and the increasing popularity of alternative investments on the other.

      3. The important point here is long term, with every country facing roughly the same situation, immigration won't matter much.

  3. Btw, Malthus had 3 yeah, he's literally a doombringer as well.

  4. Excellent article! One point on education policy: could making coding as a basic skill alongside numeracy and literacy solve the problem of overqualified workers and also help to boost growth?

    I'm thinking in terms of the Solow model here. If growth in investment and growth in technology exceed declines in population, surely we will be able to avoid secular stagnation as the overall growth rate will remain positive.

    Disclaimer: I have read Hansen's paper but only vaguely recall its contents being similar to the Solow model. I have not read Summers yet.

    1. @Rahman

      Technically you are correct. Empirically, what's happening is sort of the opposite. As populations age, TFP growth is declining.

      Intuitively, population decline implies a contraction in market size. That means less incentive to increase capacity (AKA investment).

      The technology aspect is quite interesting and controversial. My personal view is that it's increasingly difficult to monetise technological advances i.e. consumer surplus is increasing. That means increases in quality and standard of living will diverge from GDP growth.

      The implication here is that low growth per se is not a problem. It's the implications for policy and for markets. I think a lot of the noise (e.g. Japan) about population decline is coming from a financial market perspective, not a real economy perspective.

    2. @hishamh

      Ah I see. Looks like I have to go off and read a few papers about the empirics of TFP :)

      It's interesting you say that about technology, living standards, and GDP growth. It really echoes what Solow says about the IT revolution showing up everywhere except the statistics.

      About market reactions, I reckon intuitively that its because a smaller market size would only manifest slowly over time - thus adjustments in the real economy may not be seen until five to ten years from now perhaps?

    3. @Rahman

      One recent research:

      Roubini has a good summary of the thoughts on the current productivity slowdown:

      On the market reaction, I think it has already been going on for nearly the past couple of decades e.g.

    4. @hishamh

      Thanks man! Will check 'em out :)

  5. I am not an economist, and therefore is totally ignorant of economics models and theories. Therefore, I am going to ask the following questions from the point of view of a layman :
    Question 1. As the population ages, wouldn't we have more people with more experience and wisdom to tackle the world's problems than if the situation is otherwise?
    Question 2. If we are going to have more old people than young ones, and old people have more experience and wisdom to tackle the world's problems compare to those who are young, then the trend of an ageing population couldn't be a threat to our growth and rising standard of living as we make it out to be; shouldn't it?
    Question 3. If it can be postulated that an ageing population is not an obstacle to our growth and rising standard of living, what then are the real obstacles/problems/culprits?

    1. @Muhammed,

      My thoughts on your Qs:

      1. Not necessarily. Older people tend to be more conservative. The UK's Brexit referendum is a good example.

      2. What I see is that living standards will continue to grow, but overall growth will not. It's as much a perspective problem as anything else. My preference would be to track GDP per capita growth, not GDP growth.

  6. You know what you are selling? That more mouths means more growth from more demand and supply.

    That's great because it means the welcome growth is sufficient reason to end the NEP/NDP since our Malays are the fastest growing race in this country.

    And then you end by saying oh god you wish you are wrong!

    Make up your mind finally, man.

    1. @anon

      And here I though I was arguing the opposite - we will run out of growth, because there won't be enough mouths to feed and hands to work.

      Note that the Malay fertility rate is actually just a hair above replacement level, and is dropping just as fast as the Chinese or Indians. I see no reason to celebrate here.

  7. On fertility, I disagree with the notion that it is purely a human choice. The economic pressure on raising a child is very real and is very influential for couples in deciding how many children they will have. Advances in family planning have only empowered them further in making the choice. It does turn it into a more hard-nosed cost-benefit analysis but the pressure to do so is very real and unavoidable.

    If we want to address the issue, then we have to address the source of the problem, which is the economic pressures, which is why governments have taken steps in subsidising childcare, increasing access to education, and creating more affordable housing for the next generation.

    1. I'm not well verse with economic models and theories but thanks for the insightful article with a view of global perspective! I have seen similar article that saying Malaysia will become aging nation by 2035 according to statistics.

      I do agree with Roger. With the sky rocketing in cost of living, raising a children costs a lot more than ever. But of course, the culture has changed too, younger generation are no longer frugal like in the past, it's all about instant gratification now.

      Like the saying goes, prevent is better than cure. So I supposed another important effort from the government that needs to be done would be increasing the financial literacy in Malaysian especially for the younger generation.

    2. @roger dodger

      I agree. The costs and effort in raising children is probably under-emphasised as a factor in reducing fertility. Childbirth alone is an already expensive undertaking.

    3. @Henry

      Financial literacy is being implemented as part of the school curriculum. I'm not hopeful of the results though. But that's a topic for another day.

  8. I think it is very myopic to be bound by a very westphalian frame of mind. The world population is still growing it just that it is happening in the developing and least developed countries. Thefore the most dinamic and productive member of the world population will be in these countries and so will the future world economic growth is. A dinamic and open imigration policy to encourage freedom of labour and talent is the only way foward for us.

    1. @ahmad afandi

      One of the reasons why I started looking at this issue earlier this year, was when I saw this set of charts:

      Any single country can buffer population decline by opening borders to immigration. But this cannot be a solution for all, unless we can get Martians and Venusians to immigrate to Earth.

      Global population growth as a whole is in decline, not just in developed economies, but also in the poorest ones as well. We're increasingly getting the phenomenon of growing old before growing rich (Thailand is a good example). Singapore successfully tried it for a decade, but ran out of space and the patience of its citizens. In the end, immigration is not the solution, but just a way to buy time.

  9. 2 questions:
    1) "As society ages, growth declines". This is one of the key take away I got after reading your article. If that is the case, I wonder why people all over i.e governments, central banks are hung up on growth? If headline growth is flattish, but standard of living is increasing, do you think we should find another way of quantifying standard of living?
    2) This is not related to the article above. I was reading the Edge and there was this article by Dr. Alireza that states "in finance, we often refer to exchange rate behavior of a country as a benchmark of its economic efficiency, given a country's degree of openness to trade". I am somewhat confused with this statement. What is your take on this?

    1. @stress_unplugged

      1. I think GDP per capita is a better metric, but even that has problems. There is an ongoing search for better measurements of human welfare, but no consensus has emerged yet. I agree though, we shouldn't be too hung up on growth.

      2. It sounds like BS. To me, since exchange rates are relative and not absolute prices and given the herd behaviour of financial markets, they have little to say about economic performance or efficiency. This is especially true of commodity currencies (like the Ringgit or the Aussie Dollar), which are subject to the volatility of commodity prices.

      Since commodity prices are inherently "inefficient" (time delay in adjusting supply relative to changes in demand), that promotes large fundamental misalignments in fixed exchange rate regimes, and high volatility in flexible regimes.

    2. Thx for your input! Another learning day for me

  10. Just wondering what is the source for the Global Economy for the period from 1AD to 1700AD?

    1. @Tamilarasan

      The Maddison Project:

      There are a couple of other datasets publicly available I think, with roughly similar numbers.

    2. Thank you! much appreciated.

  11. Acemoglu's idea about the role of institutions. Better judicial system rewarding innovation and punishing infringement. Central bank independence. Independent corruption board. Transparent industrial policy. Allow inefficient firms to die rather than perpetually propping them up. There are many we can do. Not sure if we or anyone can do it.