In a recently published major essay (Is US Economic Growth Over? Faltering Innovations Confronts The Six Headwinds, NBER), Professor Robert J. Gordon has re-opened the old wound about the limits to growth and in so doing, challenges the consensus mantra about growth at any cost. Although the study is mainly about the US, with references to the UK up to 1906, there is no reason as to why this analysis is not applicable to other developing nations.
Professor Gordon divides up development since 1750 in to three organising principles: the take off point, in to industrial revolutions one, two and three – one the development of the steam engine and railroads; two, from 1870 to 1900, the period which oversaw the development of electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum); and three, from 1960 to the present (computers, the web, mobile phones).
He concludes that the second period was by far the most important in terms of progress and was largely responsible for the 80-year period, 1890 to 1972, during which rapid development took place. It was also the period that saw the development of air conditioning, airplanes, interstate highways, etc, which, he said, once they had run their course, the period between 1972 and 1996 witnessed much slower growth. Many of these were one-off developments: women in the workplace, urbanisation, central heating, speed of transportation, etc.
Professor Gordon reminds us that trend growth for the US between 1860 and 2007 was 1.9 per cent. Since the end of the dot.Com boom in the late 1990s, most developments in technology have been in the entertainment and communication sphere – smarter, smaller, more complex, but they do not add to human prosperity. Gordon suggests that future technological innovations will continue to add to improvements on the standard of living, but progress will be slower than in the past.
But there will be six headwinds, as he calls them: the end of the demographic dividend; rising inequality; factor price equalisation arising from the interplay between globalisation and the Internet; poor secondary education and the high cost of higher education; environmental problems; and the overhang from consumer and public sector debt. He goes on: “The audacious idea that economic growth was a one-time event has no better illustration than transport speed. “Until 1830, the speed of passenger and freight traffic was limited by that of ‘the hoof and the sail’ and increased steadily until the introduction of the Boeing 707 in 1958. Since then there has been no change in speed at all and in fact airplanes fly slower now than in 1958 because of the need to conserve fuel.” Gordon predicts that growth will decline again by 2100.
What does this theoretical assessment matter for a small semi-open economy like Barbados? The collapse of the global economy – or more correctly Anglo-Saxon economies – in 2007/8, due in part to the sub-prime crisis, has led to a reign of terror by national regulators, each looking over their shoulders to see what rivals are doing. The net result has been a tightening of regulation which has led to a drying up of credit for small and medium enterprises, the drivers of economic growth and job creation in most liberal economies. It is in the main regulation through a rear-view mirror, regulating the last problem, while being totally ignorant of the coming car crash. Small economies in particular are in danger of being caught in this colossal car crash as collateral, battling to survival in an environment not of their own making.
Fundamentally, global finance has developed from the pre-1990s days of lending being a proportion of savings, although there is still space for such lending in the current environment. However, if all new business ideas or growth plans had to wait until enough savers had deposited enough money with a small retail bank so that the generous manager could lend to enterprising people, then industrial growth would advance at a snail’s pace. What we have witnessed over the last two decades is highly skilled financial engineering which allows entrepreneurs to take their ideas to market and secure funding from banks or shadow banks or venture capitalists, in ways that never happened systematically before.
In the new environment, lenders need a sound capital cushion, which could be guaranteed by government with strict conditionality, such as detailing who would be eligible to borrow, obtaining an equity share in the lending firm for the public sector guarantee and a clearly defined exit strategy. This lack of intermediation is particularly felt in the leisure and tourism industry, and with the poorly-performing hotels especially. The problem is that a lot of the bad loans on banks’ books are the small and medium hotels, which are necessary to the centrality of tourism in the economy. Given their systemic importance, it is surprising that government does not have a strategy to deal with these badly managed hotels.
Here government (central bank) intervention can take a number of different forms: equity for debt, corporate bonds, business plan restructuring, new managements, sale and lease back of the business, outsourcing non-core aspects such as the laundry and restaurant, separating the business from the property and intellectual property, etc. All or any of these would ease liquidity for the business and allow it to continue trading while at the same time redrafting the business plan.
But, and this is crucial, all this can only be done with the right regulatory, fiscal and monetary strategies in place.
This means, at the very least, businesspeople and government sitting down and working out strategies for the benefit of the business community, and so, for the macro—economy. Such policy developments and interventions are challenging and call for a measure of expertise that is rarely found in small island economies.
But, acquiring such practical knowledge and expertise are not beyond the scope of a small economy with a huge investment in human capital. Even so it calls for team work, collectively working across ideological and academic boundaries, and not retreating in to the traditional silos and blinkered thinking. To expand on the small and medium hotel sector, one view, which I support, is that if they fail they should be sold and let better owners and managers take control. However, if it is the view of government that although these hotels on their own may not be systemically important, collectively they are too important to fail, then there must be an industry wide macro-economic strategy to stress test a variety of likely failures. All this depends on how government sees financial stability, its importance in wider social policy, and how it defines it, and, just as important, the introduction of economies on a sector-wide level.
A good example of this is the laundry service; why should each small hotel have a complete laundry service when a single one can provide that service at competitive rates? Afterall, this is no an obvious area of commercial confidentiality or competition, so the benefits for the sector as a whole and for individual businesses would be obvious. Knocking heads together is a job that can best be done by the trade body, the Barbados Hotel Association, of government, the relevant ministry or ministries. Sitting on their hands is not an option, especially in a time of crisis.
Another, of course, is in-house entertainment, which is based around getting guests to spend more in the bar, but if, like the now closed Almond Resorts, drinks are ‘free’, then this argument does not hold water. In the final analysis, it is the intersection of industry structure and performance and the capital markets which will determine the return to growth.
The mantra of economic growth masks a historical reality that few know and many do not want to understand. For example, until the highpoint of African Chattel slavery, England’s economy grew at a rate of about 0.2 per cent from 1300, the ending of the so-called Dark Ages, to 1700. As Professor Gordon points out, for four centuries there was almost no economic growth in England. Real significant growth started in the 19th century and grew exponentially in the 20th century. However, we are now in a different ball game. Consumption in Barbados, like the US, grew for most of the post-Second World War far faster than real GDP, encouraged by cheap money. This illusion of growth, encouraged by politicians and policymakers, and in particular the central bank under Dr Marion Williams, led Barbadians to believe that they were ‘punching above their weight’, that they had become a ‘developed’ society. It was powerful myth-making which is still a central part of the national narrative of how Barbadians see themselves. So powerful is this myth that even though as a nation we go cap in hand to Trinidad and the regional funding agencies, we do so in the firm belief that we are special, that our present condition is a temporary blip.
In his book, The Poor Half Billion in South Asia, Ejaz Ghani reminds us that quite often the conventional wisdoms do not relate to reality. Writing about South Asia, the fastest growing region in the world, he said contrary to popular assumption, South Asia has more people living below the poverty line than Sub-Saharan Africa. He also makes the point that economic growth is not the sole mechanism for reducing poverty in itself, but must be followed by a programme of social change. Social indicators, such as education, housing, healthcare, and greater gender equality, all make huge contributions to overall progress. Ghani cites as evidence the fact that India is one of the two fastest growing economies in the world and accounts for 80 per cent of regional GDP. He points out that the number of people in South Asia living on under US$1.25 a day grew from 549m in 1981, to 595m in 2005, and in India alone, the number grew from 420m to 455m over the same period, although the total fell from 60 per cent to 40 per cent over the period.
One important question is why does the poverty rate in India, with a population similar to that of its neighbour China, dos not fall equally or nearly as fast?
One answer maybe that China has done more to remove inequalities than India, although inequality in China has grown by leaps and bounds.
However, Ghani believes that one possible answer is that China has grown faster than India, which may provide the answer, although this is not conclusive. He also looks at the expansion of primary and secondary education as possible clues. For example, although adult literacy has grown in South Asia, matching global trends, the region falls behind the rest of the world in secondary education, which he assumes, is far more important even than primary education for economic growth. Further, in terms of health, South Asia has the highest rate of malnutrition and the most undernourished children in the world. And, Ghani reminds us, undernourished children have the highest rate of mortality, lower cognitive ability (that is the ability to learn), and are more likely to drop put of school.
Then there is gender inequality, which persists through South Asian culture, even with those from those cultural backgrounds who live outside Asia. This inequality starts from pregnancy in a culture environment that prefers boys to girls (see: Where Have All the Young Girls Gone? By Sonia Bhalotra).
The Barbados economy is in real danger of prolonged stagnation, and all that implies, no matter which party wins the next general election.