Tuesday, August 19, 2014

The globalization opportunity in secular stagnation

Consider this parable of a two-country world.  Stagnation Land is a prosperous country with high per-capita incomes while Emerging Land is poor.

However, in recent years while the former has been experiencing declining productivity growth, the latter has been experiencing large gains in productivity. A large majority of people in Emerging Land have been moving out of agriculture into more productive manufacturing and services sectors. This transition has been accompanied by sharp increase in consumption and aggregate demand. Further, Stagnation Land has an aging population while Emerging Land is at the demographic sweet-spot. This has had the effect of increasing savings and dragging down aggregate demand in the former. As a result of these trends, businesses in Stagnation Land have declining investment opportunities and lower returns on their investments whereas those in Emerging Land have a rapidly expanding supply of investment opportunities and higher rate of returns.

Faced with such a situation, Econ 101 teaches us that the natural response would be expand trade and other economic linkages between the two countries. Stagnation Land has the technologies, businesses, and even capital, all searching for opportunities. It also faces an aging population and resultant demand for different kinds of labor. Emerging Land has rising productivity, remunerative investment opportunities, growing consumer demand, and a large pool of labor. The complementarity could not have been any more mutually beneficial. The scope for a new growth compact between the two countries could not have been more opportune.

Now replace Stagnation Land with the developed economies and the Emerging Land with the developing economies, and the context to the prevailing socio-economic prospects of both parts. Commentators in developed countries have been wailing at the prospect of a long period of economic stagnation, popularly described as "secular stagnation". If the aforementioned parable has any significance, then we should see the current problems in the developed world as a great opportunity to construct a new paradigm of economic and social co-operation between the developed and developing countries driven by mutually beneficial imperatives.

This paradigm would have to be constructed on a platform of cross-border business trade and investments, technology transfers, relaxation of labor migration controls, and so on. In simple terms, more global economic and social integration. 

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