Economic growth – far, far away

Prosperity is becoming more like a fairy tale to many as economic growth recedes

Many a story begins with the words – “once upon a time, in a land far, far away”. For a growing number of people in developed countries, this opening line sounds like the beginning of a tale about economic growth. Trends such as globalization have increasingly resulted in winners and losers in a way that those who gain are increasingly separated from those who miss out. Thus, economic growth can seem a world away to many people as if a mere fairy tale.

For a few decades after the world wars, it seemed as if the tale of economic growth would be one of those stories with a happy ending. In the West at least, the economy was providing decent wages for most people in jobs and mass consumerism was offering up everything anyone might want. The rest of the world was still stuck in relative poverty but the expectation was that they too could catch up later.

The narrative changed as manufacturing started up in developing countries. Factories had helped boost wages in the West by making workers more productive, but rising pay also increased the lure of cheaper labour elsewhere. The progress was gradual but eventually the growing capacity of manufacturers in Asia, culminating with the rise of China, eroded the high-wage manufacturing sector in the West that had helped build the middle class. Automation was always likely to have the same effect but globalization accelerated the trend and has thus borne the brunt of the blame.  

Globalization has made things worse in other ways too. The ease of transportation that is a part of globalization also means that places where goods are produced often being separated from the point of sale. So even though everyone will benefit from lower prices, any wage gains from more productive manufacturing will tend to remain close to the factories. So just as has happened in the West, China prospered as manufacturing created a new middle class there.

The site of production is important in that it takes away not only the work but also much of the future benefits of higher wages generated by productivity gains. And once a manufacturing base is established, a whole ecosystem of business builds up around it. So, the high-tech production facilities central to electronics and computing are likely to stay in Asia in the same way that Detroit dominated car making for so long.

On top of this, globalization has had an impact through offering up larger markets and hence creating bigger business. An increase in scale usually helps companies be more efficient and provide goods and services more cheaply. But bulking up in size also comes with more automation and outsourcing that are used as means to save on labour costs. Being bigger also helps business get its own way with governments as well so as to limit the extent to which policy might boost wages or provide economic support.

The increase in the scale of global markets is also good for those with skills to sell on an international level. Such skilled workers tend to migrate to the larger cities where it is easier to promote their increasingly specialised talents. And the freedom to move around within borders means that people increasingly sort themselves into likeminded neighbourhoods which often overlap with economic outcomes.

Previously, greater proximity of people from different economic classes would have meant that some of the spending by the well-off would have gone into the pockets of people from the “other side of the tracks”. With the service-based economy, much of the spending nowadays would not reach to the other side of the country. Even when able to work for big business or the wealthy, those on lower wages miss out as, even though their earnings would probably be higher, they also typically need to fork out more for higher living costs.

So previously, market forces might have been sufficient to spread the wealth. Higher consumption by some would see more money going to others who had less to spend. So even if some were doing better than others, a rising tide would have lifted all boats as JFK suggested. But the changes to the economy outlined above means that things are different from the 1960s. The greater physical and cultural separation means that market forces would not be sufficient to spread wealth as in the past.

What is true within borders is even more relevant when looking on an international scale. The growing levels of wealth in places like China could potentially offer opportunities for work in the West. Yet, the intricacies of Asian culture often mean that many consumer goods are produced locally for the domestic markets. With limited access for imports, Asia has become just a source of cheap goods and not so many job opportunities for workers in the West (bring us to the same conclusion that was expected of automation).

Out of those prospering from globalization, it is no surprise that the foreigners are getting most of the blame. The greater distance separating those prospering in the East from those struggling in the West means that it is more difficult to share around the new-found wealth. And big business is more likely to provide the precious jobs back home, which is used as a reason to argue for measures such as lower taxation to help create work.

Yet, there is a good argument for the government needing to come up with resources to do more. There is a notion in economics that, if the market is not working as one would hope, then there is scope for the government to step in. We are seeing this happening in terms of the “levelling up” policies of Boris Johnson and the stimulus package by the Biden administration. Yet more permanent policies need to be established to rectify what seems like a persistent feature of the economy and what could potentially result in a backlash. And that would be an ugly end to the story of economic growth.