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Learning Economic Dynamism

Why are some of the world's most advanced economies--France, Germany, Italy, and Japan--suffering stagnant growth and high unemployment? More fundamentally, why do these countries seemingly fail to exercise the kind of economic leadership and innovation that their histories lead us to expect, especially in the innovative high technology sectors that most define our future?

Weak economic performance in these countries is even more puzzling in view of the sharp drop in their birthrates decades ago. Their population pyramids are now skewed towards middle-aged people who are in their most productive years and relatively free from the burden of raising children. Their per capita living standards should thus be substantially higher than in the US, where swarms of kids must be attended to and where new investments must be made just to keep the capital stock growing in step with a swelling population.

Of course, what is advantageous today may be problematic tomorrow: Europe and Japan will face severe problems when their demographic pyramids tilt towards the elderly, eliminating the temporary demographic advantage they have relative to the US today. But this isn't what ails their economies now .

Edmund Phelps of Columbia University says that these slow-growing countries lack "dynamism," which he defines as a combination of entrepreneurial spirit and the financial institutions to channel it. Both spirit and the necessary financial institutions must be present to enable "creative destruction" - the force Joseph Schumpeter argued sixty years was the engine of capitalist prosperity - to be unleashed.