Hard Truths About Global Growth

A healthy state balance sheet could help, because part of the income flowing to capital would go to the state. But, with the exception of China, fiscal positions around the world are currently weak.

As a result, deleveraging remains a clear priority in a range of countries, reducing growth, with fiscal countermeasures limited by high or rising government debt and deficits. Thus far, there is little evidence of willingness on the part of politicians, policymakers, and perhaps the public to reduce current consumption further via taxation in order to create room for expanded growth-oriented investment.

In fact, under fiscal pressure, the opposite is more likely. In the US, few practical measures that address the distributional challenge appear to be part of either major party’s electoral agenda, notwithstanding rhetoric to the contrary.

To the extent that this is true of other advanced economies, the global economy faces an extended multi-year period of low growth, with residual downside risk coming from policy gridlock and mistakes in Europe, the US, and elsewhere. That scenario implies slower growth – possibly 1-1.5 percentage points slower – in developing countries, including China, again with a preponderance of downside risk.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution. His latest book is The Next Convergence – The Future of Economic Growth in a Multispeed World ().

Copyright: Project Syndicate, 2012.

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