Two wildly different ones, but together they will exert a massive influence on economic growth and the outlook for the world economy for generations, according to economist and author Dambisa Moyo, in her address at the CFA Institute Middle East Investment Conference 2016 in Bahrain.
Setting a bearish tone, Moyo said that the world economy will never again experience the rapid growth rates seen prior to the financial crisis of 2007–2008. She found this to be “incredibly damning.”
In order to put a significant dent in world poverty, Moyo continued, there must be a global growth rate of around 7% a year. At best, she said, we are expanding at 2.5% annually. And in the emerging markets, where the vast majority of the global population lives, few nations are hitting that 7% mark. Indeed, Brazil is in the midst of a recession.
As for the headwinds behind this stubborn decline in economic growth, Moyo pointed to technology and demographics.
Over the next 20 years, 47% of all jobs in the United States will be eroded or disrupted by technology, Moyo said. Think of the changes caused by the shift away from agriculture since the early 1900s. At the outset of the last century, Moyo observed, much of the US workforce was involved in agriculture. Today, less than 2% of the US workforce is. This transition is largely a function of technological advancements, and Moyo anticipates similar transformations in the years ahead.
Most of the heavier automation is taking place where much of the world population works, in the unskilled or low-skilled positions of the manufacturing sector. This leads to fewer jobs and fewer hours worked — to less human productivity — and is accompanied by a decline in real wages, thus further impeding economic growth.
And while automation is not yet a force in the service sector, Moyo believes it is only a matter of time until it is. Like the manufacturing sector before it, the service industry will be transformed. It will be a hugely complicated transition, Moyo acknowledged, pitting the competing interests of policy makers against those of corporations and their cost lines as well as tech companies and their view of technology in general.
In sharp contrast to the decline in jobs and human productivity, global demographics are exploding. Currently, 7.5 billion people live on the planet. To put this into context, there were three billion in 1960, and it took 125 years to expand from two to three billion, Moyo said. According to a 2015 UN study, this growth will continue until a predicted plateau of 11 billion in 2100. In a poll taken before Moyo’s presentation, however, a plurality of conference participants said demographic forces will have a positive influence on global growth over the next year.
“We are living in an incredibly unique time in the world because of these demographic shifts,” Moyo said. The speed at which the world’s population has increased is unprecedented and is unlikely to be repeated once the 2100 plateau is reached. India alone is growing by a million people a month, according to Moyo, while the world population is increasing by 60 million a year. These are incredibly rapid changes that carry with them huge economic and social risks if they are not managed properly, Moyo warned.
One of the attendant risks is increasing longevity and the accompanying costs of aging. According to Moyo, the expectation is that by 2020, more than 30% of the populations of 50 countries will be over the age of 65. For the most part, these cohorts will not be working, creating an increase in the dependency ratio. So not only will we have longer life spans, we will have skyrocketing health care, welfare, and pension costs, all of which have a huge effect on quality of life.
Add in the volatile issues of immigration and migration, and there are all the ingredients for political and social instability. It is possible, Moyo claimed, that the swift transformation of the demographic make-up of the United States and Europe will result in minority majority populations by 2050. Social concerns are going to scale to the top of the public policy agenda faster and more urgently than governments are capable of handling them, she said, noting that under-investment in education alone is so extreme that many predict it could put the United States in a state of permanent recession by 2050.
“Public policy is quite impotent to handle these very real risks,” Moyo concluded. There is no “toolkit” available, as policy makers continue to put forward fiscal and monetary policies that have been largely ineffective
The premium is going to be on skills, Moyo stated. We need to invest in technical skill development in a vocational way, and not necessarily emphasize tertiary education, she said. We must also encourage a system of immigration that accesses the surplus of talent across the globe in a way that all economies can benefit.
Otherwise decreased opportunities, combined with rapid demographic shifts, will exacerbate the drag on the economy until the potential for growth has disappeared.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo courtesy of George Raphel.