The Future of Economic Growth
Given the failures to foresee the 2008 financial crisis and subsequent weak recovery, it is easy to think that economists have little to offer in the way of predictions. But when it comes to national-level GDP growth, past projections have largely been borne out; even when wrong, they can be used to diagnose structural problems.
MANCHESTER – Last month, I wrote about the growing divide between economic theory and real-world economic conditions, and reminded readers that economics is still a social science, despite whatever loftier ambitions its practitioners may have. Nonetheless, when it comes to the specific question of what drives economic growth in the long term, one can still offer rigorous predictions by focusing on just two forces.
Specifically, if one knows how much a country’s working-age population will grow (or shrink), and how much its productivity will increase, one can predict its future growth with considerable confidence. The first variable is reasonably predictable from a country’s retirement and death rates; the second is more uncertain. Indeed, the reported slowdown in productivity across advanced economies since 2008 is widely regarded as an economic mystery.
Is it really a mystery, though? Consider the following table, which shows GDP growth since the 1980s for the larger economies, the BRICs (Brazil, Russia, India, and China), and the “Next Eleven” (N-11) most populous developing countries.