lipped from: https://www.thehindubusinessline.com/economy/2020s-may-be-a-lost-decade-rbi-deputy-governor-patra/article66960241.ece
Recurring financial crises, the pandemic and Ukraine war have accentuated the global slowdown, he said
The 2020s (2022-30) may turn out to be another ‘lost decade’, with powerful forces – financial crises recurring with disturbing intensity; the once-in-a-century pandemic; and the war in Ukraine, all of which have left lasting scars – more recently accentuating the global slowdown, according to MD Patra, Deputy Governor, RBI.
In this regard, he said it is widely believed that a structural slowdown has been spreading across the global economy after growth peaked in 2010, resulting in 10 lost years from 2010.
About half of this slowdown (since 2010) can be attributed to demographic factors: an ageing population; slowing working-age cohort increases; and declining labour force participation.
“Alongside, growth rates of investment and total factory productivity (TCP) are declining. The engine of trade, which powered the global economy in the 1980s and 1990s, has also weakened considerably,” the Deputy Governor said at the Sixth Asia KLEMS Conference at Lonavala.
Gains from better education and health have diminished, as improvements in education and healthcare systems go abegging for lack of investment, he added.
Linkages between physical and human capital
Patra said the secular slowdown over the last decade and expectations of another slow decade ahead warrants a renewed exploration of the linkages between physical capital investment, improvements in human capital, and exploitation of technological advancement.
“In an environment in which populations across the world are either ageing or declining, and investment rates are trapped in a long-term deceleration, including foreign direct investment, it is perhaps an opportune moment to focus on productivity growth as the means of arresting the downturn, and charting a new trajectory for pushing outwards the growth possibility frontier,” he said.
Patra referred to American economist Paul Krugman’s statement: “It has been observed that productivity is not everything, but in the long run, it is almost everything”.
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Referring to a World Bank report ‘Falling Long-Term Growth Prospects: Trends, Expectations, and Policies’, he said: “It has been argued that the global potential growth rate – the maximum growth rate that an economy can sustain in the long term at full employment and full capacity without igniting inflation (its speed limit, if you will) – has fallen by close to a full percentage point in 2011-21 relative to 2000-10.”
Slowdown major setback for developing economies
He observed that the global slowdown has pulled down advanced economies (AEs) and emerging and developing economies (EMDEs) alike, but it has imposed a major setback on the latter, pushing back their chances of catch-up or convergence. Consequently, their capacity to lift their populations out of poverty, reduce inequality and achieve the aspirational goals of development are endangered as well as their ability to harness the benefits of newer technologies stemming from green transition and the digital revolution.
“What is worrisome is that for EMDEs, all the growth drivers – factor re-allocations; human capital formation; the share of working age population; investment growth – are losing strength at the same time. This could stall the process of development that has been underway since the middle of the preceding century,” Patra said.
Meanwhile, policy uncertainty at the global level has surged and forces of de-globalisation and trade and finance disintegration have gained ground, vitiating the environment in which EMDEs sought to harness developmental opportunities and manage their challenges.
Services sector potential
The Deputy Governor said EMDEs need to leverage the potential of the services sector to drive productivity growth.
“Investing in ICT infrastructure, securing reduction in trade costs such as those associated with shipping, logistics and regulation, and supportive business-enabling reforms, could help engage the private sector in partnering in this endeavour,” Patra said.
In addition, raising labour force participation rates, especially among women and older workers, could boost productivity, but this would require investments in workability, retraining and acquisition of new skills in step with changing technology.
Patra opined that central banks need a deeper understanding of productivity trends in order to judge the position of the economy on the business cycle, so as to fashion appropriate policy responses that ensure sustained non-inflationary economic growth. In turn, this will promote financial market confidence and the overall flow of finance in the economy.
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