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The western world has a growth problem. From the postwar boom to the global financial crisis in 2008, gross domestic product per head in G7 countries drifted higher by the decade. But for the past 15 years its growth has slowed in most of them. The primary culprit is lacklustre productivity; average annual growth in GDP per hour worked in the G7 has dropped.
The remedies — upskilling, boosting infrastructure and innovation — are well established. But they seem easier to identify than to fix. Skill shortages, crumbling roads and inefficient public services persist. The pace of liberalising reforms has slowed across advanced economies, too.
It is worth asking whether the failure to enact growth-enhancing measures is itself a function of becoming rich and democratic. Indeed, might there exist some sort of “upper-income trap”? Three dynamics stand out.
First, advanced nations have already implemented the more easily attainable economic reforms. They have opened to trade, reformed banking sectors and privatised finance. Further growth involves complicated measures that help organise ideas, capital and talent more productively. For instance, Daron Acemoglu, professor of economics at MIT, believes the west is not channelling innovation as well as it could. “This reflects the dominance of a few firms that are hoarding innovative resources, and the concentration of innovation in just a few fields, such as AI, social media and consumer electronics.”
Second, continued growth requires human and physical capital to be constantly upgraded. Yet many countries struggle to make their training and education systems responsive to evolving demands. Retrofitting infrastructure is a struggle, too.
The average age of America’s industrial, power and highway infrastructure is near its highest since records began in 1925. In Britain, Victorian-era copper telecoms cables have slowed the country’s transition to high-speed internet. Meanwhile, other nations’ lack of legacy infrastructure has allowed them to leapfrog the G7: the United Arab Emirates’ Dubai metro is the world’s longest driverless train system, while Estonia has one of the world’s best digital public services.
Third is the challenge of the democratic process. In the Rise and Decline of Nations, economist Mancur Olson outlined how lobby groups can “slow down a society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions”. Gummed-up planning systems and anti-immigration groups are an example. Olson argues that influential coalitions increase “the complexity of regulation [and] the role of government”. It is hard to make everyone happy.
Other dynamics may also play a role. Some academics argue that ageing voter-bases in rich countries will increasingly shift political incentives and resources away from younger workers, which can lower growth.
A handful of richer nations have managed to significantly raise their GDP per capita over recent decades, including Singapore, South Korea, Taiwan, Switzerland and Ireland. A few have authoritarian tendencies, but they are generally well-governed small states, a grouping that former Armenian president, Armen Sarkissian, evaluated in The Small States Club. Their size has encouraged strategic resource planning, national cohesion, specialised innovation and openness, which has supported agility.
There may be transferable lessons for larger, rich democratic countries. First, focus helps channel resources effectively. Second, size and varied interests make democratic decision-making slower and harder. Devolving more decision-making to a regional level, designing policies that compensate losers better and addressing inequalities would help. Third, regulators need to be better resourced and higher skilled to handle complex reforms at greater pace.
Technological invention has historically spurred productivity growth. Many hope artificial intelligence will do the same. But capitalising on AI means overcoming the same broad dynamics that G7 economies are dealing with today: optimising regulation of the technology, electrifying old energy systems to power it and supporting those who may lose their jobs.
The so-called “middle-income trap” — in which nations struggle to transition to higher-income — has been undermined by escapees, including South Korea, Taiwan and Poland. With appropriate reforms, it can be overcome. Likewise, if an “upper-income trap” does exist, it is not because the economics will not allow continued prosperity. Rather, it requires the right policies and politics to unlock it.