Whereas a focus on the business cycle has a three to five year time horizon, we can also identify longer cycles of economic activity. A wide literature exists on the incidence of the so-called Kondratief cycles, i.e. long-term economic cycles with a focus of over 20-30 years. These longer term technologically driven cycles often give rise to so-called mega trends, which overshadow the business cycle.
In the post-financial crisis economic landscape a number of such mega trends have been identified[1]. These mega trends can be regarded as a given over the foreseeable future. Government, business enterprises and households have little choice but to adapt to these trends:
- The first trend relates to geo-economic shift. The populous Chinese and Indian economies are ascending rapidly in the world economic rankings, as well as other emerging market economies (in East Asia, Latin America and Africa). These countries exhibit appreciably higher economic growth rates and upcoming middle class populations, embodying huge market potential to exporting countries.
- Secondly, the socio-digital transition, i.e. the arrival of the microchip (late 1960s) and the subsequent technological revolution in the field of computers. This transformed the production process (specialisation, just-in-time logistical systems, niche market production, new financial instruments, etc.), also fueling a globalization of value-chains and social media. In the past, the developed economies tended to focus on the high-end, knowledge intensive sectors and the developing economies on low-skilled production. This is changing as countries like India, Brazil and China increasingly enter the high-end market as their human capital bases are being developed. Wooldridge (Economist editor quoted by the CDE) drives home the point that innovation is no longer the preserve of the West like it was assumed to be over the past 500 years. While some commentators speculate that the computer revolution is maturing (inter alia, reflected in the decline in productivity growth rates globally), we currently do not know what the next technological wave may be (e.g. the 4th generation industrial revolution, i.e. 3D manufacturing). The socio-digital transition, natural limits to growth and green economy considerations, technological change, etc. are all interrelated themes and play in on the knowledge economy. However, the knowledge economy caters for the high-end of the market. While labour intensive production methods may be utilized to manufacture green economy products, there remains a dichotomous situation, i.e. an unskilled and unemployed labour force who need to be absorbed in up-skillable labour intensive industry.
- Thirdly, natural limits to growth (e.g. climate change) strongly suggest that the contemporary economies cannot embark on ‘business-as-usual’ growth trajectories. Change in behaviour by firms and consumers are unlikely to occur spontaneously, this will need to be nurtured by a range of incentives and penalties, etc. Relatively carbon-intensive economies will increasingly be exposed to green economy considerations in the future.
- Technological change – what are the key drivers of technological change and which tech waves do we have to ride? The incumbent era – where economic growth will decouple from resource depletion – may first head for crisis before the eco-industrial knowledge age dawns (Perez quoted in CHEC, May 2012: 11-12). The spatial dimension has also become important – services sector industries and high-tech manufacturing all feed off agglomeration dynamics, i.e. cities are likely to play a key role in a future green tech economy – close interaction along integrated value chains – quality of place has become important competitiveness factors. Cities are also ideal development platforms for sustainable infrastructure and densified spatial forms (CHEC, May 2012: 12). Innovation and research becomes key in all spheres – business, education, government, social infrastructures, etc.
Dani Rodrik defines successful high economic growth countries as follows: “High-growth countries are those that are able to undertake rapid structural transformation from low-productivity (“traditional”) to high-productivity (“modern”) activities.”
This has to happen through the support and promotion of non-traditional tradables (manufactures, mainly industrial goods and – increasingly also – tradable services), i.e. through participating and capturing an increasing share of world trade in fast-growing manufactures and services trade (e.g. call centres).
At a regional level, the movement of production activity out of the (low-productivity) traditional to the (high-productivity) modern sector in a dual economic structure lifts the economy-wide productivity levels.
This is what happened in the golden era after the 1950s – the peripheral countries around the North Atlantic hemisphere benefited from this transition much in the same way. There is a close positive correlation between a countries’ share of industrial production in GDP and rates of economic growth.
Key points that Rodrik makes regarding the post-crisis world economic landscape are:
- The outlook is for slow growth in rich countries for the foreseeable future (including slower growth in world trade), less capital flows to developing countries and less tolerance of trade imbalances.
- The trade liberalisation dogma is somewhat in tatters – there is scope for discriminating trade practice while adhering to WTO trade management rules and for active industrial policy in order to obviate the shift from low-productivity (traditional) sectors to higher-productivity (modern) sectors. To the extent that exchange rate under-valuation is not an option, active industrial policy should be used to support industry and give effect to changing the economic structure.
- What has to be done is to enhance the relative profitability of non-traditional products that face large information externalities and coordination failures due to a poor institutional environment (Rodrik, May 2009: 21). Rodrik states: “as long as [industrial policy] focuses on new activities at the outer margins of a country’s underlying competence – the potential upside is large.” (2012: 22). His advice is not to subsidise the established businesses (the static comparative advantage), but focus on the modern high productivity sectors. By developing the latter sectors the region-wide economic growth performance will improve.
Pieter Laubscher
19 April 2016
[1] See OneCape 2040 vision document: CHEC, May 2012