In this time of secular stagnation
I am sitting in the small, grey and dull Gimpo Airport on the outskirts of Seoul, waiting for my flight to Tokyo. South Korea is about to enter a long state of recession that could last up to two years. Over the week, hundreds of thousands of Koreans have gathered in the streets to demand the resignation of their country’s first female president, Park Geun-hye. President Park is in a deepening cycle of distrust that has emerged from tales of corruption and her recently exposed informal “shaman advisor”, which had been veiled in secrecy. South Korea’s economic growth, which is highly dependent on exports, has been stuck at under two per cent, and the opposition is having a field day with the president and her stalled administration. And then there is Samsung. Things are not looking bright. Over the past few months, I have been trying to see future development trends through the current flow of confused events. Even though a lot is going on, one phenomenon, a trend, clearly rises above all this noise: in the West, we are about to enter an era of permanently very slow, almost non-existent, economic growth. This stagnation of economic growth, a situation we have perceived as an “illness”, appears to be what will become known as the “new normal”, particularly in Europe. There is currently more and more talk about the concept of “secular stagnation”, which refers to long and slow growth and was introduced to the economic discussion in 2015 by Lawrence H. Summers, a professor at Harvard and an economic advisor to Clinton and Obama. It is as if people are beginning to wake up to the fact that the cycles between economic growth and recessions are no longer occurring in line with the traditional explanations of economists. We have shifted to a situation where societal development and changes seemingly take place without quantitative economic growth or the pull and potential provided by traditional economic growth. The current state of secular stagnation can be attributed to the economic crisis of 2008, which brought to the fore unemployment, zero interest rates, stagnated demand in the majority of economic sectors and inflation that occasionally turned into deflation. The pages of economic journals have been filled with the structural problems of the developed nations, including rapid ageing and working life changes, the unwillingness of consumers to run into debt or consume more, the slowing down of movement of capital and a strong reluctance to invest. Although governments are building recovery packages and money is pushed to the market, people continue to be dismissed and laid off; a growing number of young unemployed people sit at home, playing video games on their couches. Even in Finland, our attempts to seek better competitiveness have led to a self-made internal devaluation, wages have been cut and adjusted, prices have been reduced. Many European countries are currently run by governments that have simply ran out of money. There are notable budget deficits and states incur too much debt. And because of the EU, there are limits to how much debt can be taken and harsh measures to narrow the margin for movement of the state economy. The economic policy is running out of alternatives and a financial market crisis is hanging over our heads. Japan in focus In the Financial Times (paid content), Bill Emmott, editorial writer for The Economist, writes that now is the time to closely follow Japan and its development. What is more, Japan should no longer be perceived as the land of lost decades, long-term deflation, crisis in the financial market or Fukushima. Instead, it could provide the solution for how we should adjust and build a functional future in an era of secular stagnation. Today, Japan functions as an interesting pilot for the industrial and Western world; a laboratory for experimentations and discoveries on how to develop and cope. After all, Japan has been facing zero interest rates for a long time, and its economic growth has been slow since the 1990s. It is interesting to perceive how the current economy or societal situation in Japan no longer follows the traditional theories by economists, as the Japan of current secular stagnation has full employment, among other things. In fact, there is a labour shortage in the country. What makes the situation in Japan even more peculiar is that although the country has spent years in a state of “degrowth”, Japan’s gross domestic product in relation to its working-age population does not in any shape or form trail behind the United States, the Eurozone or the Nordic countries. Economists explain this by the decreased number of working-age population since the mid-1990s. One observation on technology Columnist Noah Smith writes how the age of secular stagnation is also related to technological development and unrealistic expectations for its future accomplishments. Despite the fact that we at Sitra also describe the rapid, nearly radical development of technology as one of the megatrends of the future, according to Smith it is actually possible that technological development will not produce the expected growth in productivity or improvements in our economy. Have we already picked the ripe fruit of technology? Aeroplanes fly at the same speed as 40 years ago; the internet is becoming more and more of an entertainment channel and is not producing a leap in productivity as previously expected; washing machines and refrigerators have been pretty much the same for decades. The only progress we see is in basic technology and in the devices that get cheaper every year. As the Japan Airlines plane starts its descent towards Haneda Airport in Tokyo, the time has come for me to turn off my laptop. Ever since the 1990s, the development of Japan has been important for the West. Japan is a useful point of comparison, since despite its secular stagnation the country has remained an innovative land with a high standard of living. You can find more on this topic and predictions for the future models of ageing societies (again with Japan as a pioneer) at the Sitra website. Stay tuned. The Weekly notes blog deals with current topics in Sitra’s strategy and research teams. You can find the Weekly notes blogs here.