Winners and Losers in a Slower Growth World

My favourite Financial Times columnist Martin Wolf asks today "Is unlimited growth a thing of the past?" (registration required to read). As usual, Wolf's observations are grounded in robust economic analysis, focusing on the slowdown in global productivity gains, notwithstanding the "third industrial revolution" associated with information technology. He also addresses the ongoing catch-up by developing countries to developed-country levels of productivity. I couldn't agree more, and have previously written about related issues in my blog "We Will Be Poorer -- Why Should We Care?" As I noted, the growth conundrum also involves issues of the ability of the planet to sustain ongoing growth, including due to issues of food and water sufficiency, security and climate change.

In a slower growth world, there will also be increasing competition among global economic actors, and the relative positioning of the major economies under these conditions is interested. Here are my quick thoughts on winners and losers:

• United States. The US is best-positioned of the major economies. It has a relatively isolated economy, substantial natural resources, and relatively limited dependence on exports (the US is a huge net importer), so has the ability to power ahead alone. Perhaps more important, the US is probably the world's most flexible economy, which explains its leadership in productivity (subject to the threats that Wolf identifies) and positions it well for changing times. For these reasons, I expected the US to emerge as a leader from the global financial crisis of recent years, and initially thought this prediction was wrong. My current conclusion is that the effect has been delayed by Chinese momentum and fiscal and monetary stimulus, as well as the overhang from the very serious effects that the financial crisis had in the country where it originated. All of these delaying effects are now moderating. Of course, the US does still face significant challenges, including its massive public debt, and the inability of Republicans and Democrats to agree on how to deal with it.
• China remains on a path to become the world's largest economy sometime in the coming decades, and its growth will likely continue to be faster than that of the West. But problems are on the horizon, probably more severe than those imagined by most who fear a "hard landing" for China. Reasons include a bubble of investment in property and industrial resources, the effects of slower global growth and increased regional competition on its export-led economy, reduced legitimacy of the Communist Party (reducing in turn its ability to impose policy), and environmental challenges (which should not be underestimated, particularly given their impact on public opinion). Despite these challenges, there are many opportunities for China. Among other things, as I have written recently, China's role as a direct investor in other countries will increase significantly in the coming years.
• Japan. The 20-year economic malaise in Japan shows no sign of abating, and Japan will not in our lifetimes return to the economic stature that it had in the 1980s. However, Japan is in the enviable position of having made most of the adjustments that it needs to make, and of being a highly homogenous, high-income and relatively egalitarian society. These traits will allow Japan to continue to deliver a high standard of living to its population in coming years. Japan is down, but not out.
• Europe is least well-positioned of the major economies. The current Euro crisis will eventually pass or at least moderate significantly, but it is a serious medium-term distraction and a symptom of the challenges of managing an economic bloc that is so culturally diverse. Longer term, Europe will face serious challenges in growing its already high incomes without the flexibility of the US economy. As a result, the overall European project will continue to stall or reverse, and regions within Europe will assume greater importance, with pockets of significant opportunity. For example:
• The United Kingdom, my home country, is facing very serious economic challenges, but is better-positioned than many European countries because of a relatively flexible economy, the strength of its financial sector, and (perhaps) because of what seems a sincere effort by the government to promote entrepreneurial business (leveraging strength in sectors like media and science/technology). The latter effort has contributed to the increasing role for London as the centre of Europe's start-up economy -- but not yet approaching in effectiveness its leading US counterpart Silicon Valley.  
• Many Eastern European countries are also well-positioned, including because of economic flexibility resulting from radical economic re-engineering in the wake of the collapse of the Soviet Union. Russia, now a relatively small player compared to the major economies, also seems to have acceptable options due largely to its natural resources strength.
• Europe has done a relatively poor job of turning its strength in science and technology into successful growth businesses. Many in Europe are working to remedy this situation, and this is a major focus of our business at Lily Innovation Advisors.
• Other Regions. I am less knowledgeable about other smaller but important economic regions, including Latin America, Asia (ex China and Japan), Middle East and North Africa, and sub-Saharan Africa. Many countries in these regions have the potential to maintain growth rates above the global average, because of various factors including relatively small size and/or particular advantages (e.g. low wages, or recent reform after past instability).

Maury Shenk, Lily Innovation Advisors