Slow economic growth does not mean not being successful
Having returned from South Korea in November last year (2016), I wrote about the messy political and economic development in South Korea in fairly low spirits. The country’s first female president, Park Geun-hyen, was later dismissed and is now accused of malfeasance and awaiting trial. The Korean economy is still struggling and economic growth in the country is weak. I also anticipated how Japan’s chronically slow economic growth, which is almost at zero and has been regarded almost as a “disease”, would also become the prevailing state and the new normal in the West. I brought up “secular stagnation”, the concept of long slow growth brought to the debate on the economy a couple of years ago by Lawrence H. Summer, a former economic advisor to Clinton and Obama.
The hypothesis I was working on was that we have shifted to a new situation in which societal development and change take place without any significant quantitative economic growth or the pull and potential provided by traditional economic growth. In a few months, the talk about long slow growth has become part of our prevailing discourse on the economy.
The current state of long and slow growth started from the economic crisis in 2008. Following this, unemployment, zero interest rates, a slowdown in demand in most sectors of the economy and the occasional slips from inflation to deflation became the prevailing circumstances. Reasons for why growth was so slow included the existence of structural problems – such as the rapid ageing of the population or changes in working life – the unwillingness of consumers to run into more debt or consume more, the slowdown of the movement of capital and an unwillingness to invest. Governments have made consecutive plans for economic revival and cheap money has been pushed to the markets.
The beginning of 2017 seemed to indicate strengthening traditional growth, but in an analysis by The Economist, this growth has not led to a reinforcement of the foundations underlying economic growth. Deeper challenges and questions remain.
The impact ageing societies will have on the future economy is one of the central challenges. Populations that age quickly are very often perceived to have a negative effect on economic growth. The view is either that the diminishing working population or the part of the working population that ages and whose productivity is declining slow down the necessary investments, or that they increase the expectations for inflation. When there is a lack of a competent workforce, people are also in a better position to negotiate their salaries and benefits than before.
Japan is the world’s first country to have moved to the “super-ageing” phase, as early as in 2006 (according to a definition by the UN). More than a fifth of Japanese people are 65 or older. In three years (2020), a total of 13 countries will have joined the club of super-ageing nations. Most of these countries will be in Europe, with Germany, Italy and Finland in the lead. The proportion of the working population in these countries had already started to decline around 20 years ago. In 2030, there will be 34 super-aged countries in the world when developed countries in Asia, such as South Korea, Taiwan, Singapore and Hong Kong, have to face up to their own demographic challenges.
But does ageing really mean the sun will set on the kind of success traditionally defined by economic growth indicators? Is Japan the pioneer when it comes to a culture of long, slow economic growth and stagnation? According to statistics, the Japanese economy started to wane around the same time that its workforce started to diminish, a couple of decades ago. The country has been facing zero interest rates and its economic growth has been slow since the 1990s.
However, the current economic and societal situation in Japan no longer conforms to traditional economic theories. When calculated in relation to the working-age population, Japan’s gross domestic product has not fallen behind the growth figures of the United States, the eurozone countries or the Nordic countries.
In January 2017, researcher Daron Acemoglu from MIT published a very interesting study on the economy of slow growth and the impact of ageing on economic growth. According to this study, extensive data material shows that ageing does not correlate with negative economic growth. The countries that are ageing fast are implementing new technology, such as robotics, artificial intelligence and automation, faster.
The role of new technology and the developments in digitisation that occur amid such a demographic change challenge and dismantle our traditional views on production and growth. Many ageing societies are making extensive use of smart robots in industrial production in order to overcome the lack of a workforce, something which Japan has done. Another example is that of the Changying Precision Technology company in Dongguan, China, which introduced 60 robots to 10 of its production lines, thus cutting down on 90 per cent of its workforce. After the change, the productivity of the factory increased by 250 per cent and the number of defects declined by 80 per cent. From a total of 650 employees, only 20 remained in the factory to take care of the automation.
Robotics and artificial intelligence will soon be intertwined with services and consumer markets in areas that have previously been labour intensive. Ageing societies in Asia, most importantly Japan, make interesting case studies for other industrialised or Western nations. They act as laboratories for the future in which solutions on how to develop and survive in an era of dramatic societal changes are sought and experimented with. Japan in particular should no longer be perceived as the land of lost decades, long-term deflation, crisis in the financial markets or Fukushima. Japan may offer us the answers for adjusting to and building a different but functioning future in an era of secular stagnation.