The prospect of recession may loom over the global economy today, but the rich world’s difficulties over growth are graver still. The long-run rate of growth has dwindled alarmingly, contributing to problems including stagnant living standards and fulminating populists. Between 1980 and 2000, gdp per person grew at an annual rate of 2.25% on average. Since then the pace of growth has sunk to about 1.1%.
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Although much of the slowdown reflects immutable forces such as ageing, some of it can be reversed. The problem is that, as we write this week, reviving growth has slid perilously down politicians’ to-do lists. Their election manifestos are less focused on growth than before, and their appetite for reform has vanished.
The latter half of the 20th century was a golden age for growth. After the second world war, a baby boom produced a cohort of workers who were better educated than any previous generation and who boosted average productivity as they gained experience. In the 1970s and 1980s women in many rich countries flocked into the workforce. The lowering of trade barriers and the integration of Asia into the world economy later led to much more efficient production. Life got better. In 1950 nearly a third of American households were without flush toilets. By 2000 most of them could boast of owning at least two cars.
Many of those growth-boosting trends have since stalled or gone into reverse. The skills of the labour force have stopped improving as fast. Ever more workers are retiring, women’s labour-force participation has flattened off and little more is to be gained by expanding basic education. As consumers have become richer, they have spent more of their income on services, for which productivity gains are harder to come by. Sectors like transport, education and construction look much as they did two decades ago. Others, such as university education, housing and health care, are lumbered with red tape and rent-seeking.
Ageing has not just hurt growth directly, it has also made electorates less bothered about gdp. Growth most benefits workers with a career ahead of them, not pensioners on fixed incomes. Our analysis of political manifestos shows that the anti-growth sentiment they contain has surged by about 60% since the 1980s. Welfare states have become focused on providing the elderly with pensions and health care rather than investing in growth-boosting infrastructure or the development of young children. Support for growth-enhancing reforms has withered.
Moreover, even when politicians say they want growth, they act as if they don’t. The twin problems of structural change and political decay are especially apparent in Britain, which since 2007 has managed annual growth in GDP per person averaging just 0.4% (see Britain section). Its failure to build enough houses in its prosperous south-east has hampered productivity, and its exit from the European Union has damaged trade and scared off investment. In September Liz Truss became prime minister by promising to boost growth with deficit-financed tax cuts, but succeeded only in sparking a financial crisis.
Ms Truss fits a broader pattern of failure. President Donald Trump promised 4% annual growth but hindered long-term prosperity by undermining the global trading system. America’s government introduced 12,000 new regulations last year alone. Today’s leaders are the most statist in many decades, and seem to believe that industrial policy, protectionism and bail-outs are the route to economic success. That is partly because of a misguided belief that liberal capitalism or free trade is to blame for the growth slowdown. Sometimes this belief is exacerbated by the fallacy that growth cannot be green.
In fact, demographic decline means that liberal, growth-boosting reforms are more vital than ever. These will not restore the heady rates of the late 20th century. But embracing free trade, loosening building rules, reforming immigration regimes and making tax systems friendly to business investment may add half a percentage point or so to annual per-person growth. That will not put voters in raptures, but today’s growth is so low that every bit of progress matters—and in time will add up to much greater economic strength.
For the time being the West is being made to look good by autocratic China and Russia, which have both inflicted deep economic wounds on themselves. Yet unless they embrace growth, rich democracies will see their economic vitality ebb away and will become weaker on the world stage. Once you start thinking about growth, wrote Robert Lucas, a Nobel-prize-winning economist, “it is hard to think about anything else”. If only governments would take that first step. ■
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Over the weekend, Iran launched a direct attack on Israel. Although Israel successfully intercepted the drones and missiles, the potential for an Israeli retaliation remains uncertain. David Blumberg of Blumberg Capital joins Yahoo Finance to discuss the state of the Israeli economy in light of these developments.
Blumberg claims that Israelis are “somewhat used to these types of things.” Blumberg notes that over the past 25 years, the country has weathered numerous crises, but has achieved consistent growth. He points to Israel’s GDP per capita of $54,000, which exceeds that of some of the world’s largest economies, as evidence of the economy’s ability to “thrive despite and through downturns.”
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JOSH LIPTON: Over the weekend, Iran launched its first ever direct attack on Israel with a salvo of hundreds of drones and missiles. David Blumberg is currently in Israel where his venture capital firm Blumberg Capital has offices and investments. David joins us now for more on the state of the Israeli economy and tech community. David, it is great to see you and have you on the show.
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DAVID BLUMBERG: Thank you so much, Josh. Great to see you as always.
JOSH LIPTON: So David, you’re in Israel now. You were obviously there over the weekend during this Iranian attack. So David, I just first want to know how you’re doing.
DAVID BLUMBERG: You can see I’m fine. I’m happy. I feel safe.
With my team here on the ground, we had a meeting with about 20 of our portfolio companies last night. We did it by Zoom instead in meeting. But people are very resilient here.
The streets, you can’t see them. They’re full of people at restaurants. The clubs are– the clubs are busy, traffic jams happening.
It’s remarkable how normal it is in a time when, I think, in America or other places, if this happened, people would be really freaking out. Israelis are unfortunately somewhat used to these kinds of things. This is the most severe it’s ever been. But they really did a great job with the Americans, the British, and the Jordanians, and French to knock down 99.9% of all the projectiles. So I think people feel like they won this battle.
JOSH LIPTON: And so David, the Israeli people a resilient community. At the same time, you know, David, they are engaged in this three-front war. It’s Iran. It’s Hamas to the south. It’s Hezbollah to the north.
It’s an enormous economic burden for the country, David. You just think of soldiers being called up and the tens of thousands of Israelis displaced in the north because of Hezbollah. How does the economy sustain this, David?
DAVID BLUMBERG: Well, I like to always look for history, Josh. So as we recall, over the last 25 years, there have been four or five war conflict situations plus COVID plus the dotcom crash plus a number of other financial crises, et cetera. So if we look at that, we see that over those 25 years, the Israeli GDP per capita measure of productivity of every individual working grew 2% to 3% faster than OECD countries during that same period pretty consistently.
Now, there were downturns and then they’ve come back. But over time, you see this growth. And in fact, I was looking at the data recently, in 2023, Israel achieved GDP per capita of $54,000. Now, that is higher than France, higher than the UK, and higher than Japan, which surprised me to see that growth. Because Israel, when I first started coming here, was a much poorer country.
But the tech boom in particular has really bolstered the economy. And as you’re asking, it seems to thrive despite and through downturns. There are downturns here, but the next year they get stronger.
(Bloomberg) — Built along a stretch of salt flats in southern India, the Tuticorin power plant epitomizes a quagmire for the world’s fastest-growing major economy: how to provide reliable energy to 1.4 billion people.
For starters, the 1,050-megawatt coal plant, one of the region’s largest, was supposed to shut down. Opened four decades ago, the facility is too cramped to install retrofits to meet the government’s pollution norms, prompting India’s power ministry to plan its closure by 2022. Yet the facility continues to run at full blast, clocking 90% utilization in February. Aging boilers guzzle coal from mines nearly 2,000 kilometers away — a transport distance that only adds to the nation’s emissions footprint.
Electricity consumption in India is growing at the fastest rate of any major economy, driven by rising temperatures and incomes, which have pushed up sales of power-intensive appliances like air conditioners. That explosive equation has exposed the country’s teetering grid. Though Prime Minister Narendra Modi has promised to rapidly build out solar and wind generation to replace polluting fossil fuels, his administration hasn’t been able to keep up with demand, giving a second life to old, inefficient coal plants like the one in Tuticorin.
In recent months, Modi has green-lit a fresh wave of power station development and extended the lifespan of many existing coal assets. It’s a decision that puts India at odds with global allies who’re shunning the fuel on climate grounds, threatening Modi’s ambitions to curb air pollution and reduce the world’s third-largest share of greenhouse gas emissions.
Those dynamics will also hand the nation a crucial role in dictating the speed of the world’s retreat from coal. Demand in China, currently the top consumer, probably peaked last year and the rate of future growth will increasingly be driven by India and Southeast Asia’s rising economies, according to the International Energy Agency.
“The message is clear to both the international and domestic audiences: We’re all in for climate actions, but India’s domestic interests will take priority,” said Ashwini K. Swain, a fellow at Sustainable Futures Collaborative, a climate think tank in New Delhi.
India’s power ministry and Tamil Nadu Generation and Distribution Corp., which runs the Tuticorin coal plant, didn’t respond to requests for comment.
India has a long way to go to ensure reliable and affordable electricity. In Oct. 2021, the country was hit by a massive coal and power crisis, just as the economy began to emerge from the Covid-19 pandemic. Years of weak demand had led to sluggish growth in mining, transportation and power generation capacities.
Soon after the situation improved, officials realized the crisis wasn’t a blip. Energy demand rose to a new high the following summer, causing the worst supply shortages in eight years. In 2023, even though that squeeze eased at the national level, Maharashtra, one of India’s most industrialized states and home to its financial capital Mumbai, faced an alarming 10% peak deficit in August.
While shortages raised expectations that the country would accelerate the shift to green energy, India’s response was exactly the opposite. Officials pushed for more mining, abandoned plans to retire old power plants, raised targets to add coal-fired electricity and successfully lobbied international forums to adopt resolutions that wouldn’t hinder fossil fuel use.
“As a country, we should play to our strength, and coal is our strength,” said Prakash Tiwari, a former operations director at state-run NTPC Ltd., the nation’s largest power producer.
Alternative energy solutions haven’t yet caught on for financial, political and safety reasons.
More than 35 miles from Tuticorin, a dusty road leads to two solar power plants surrounded by sprawling wind parks. Ayana Renewable Power, which runs one of the facilities, sees a future in renewable power with energy storage to serve industrial users. That trend is rising in India, although far from becoming a source of mass power supplies. Solar accounted for 6% of generation in 2023, according to Bloomberg calculations based on power ministry data.
State-run power producer NLC India Ltd., which runs the other plant, is committing more than twice as much money to expanding mining, coal and lignite-fired power capacity than to building renewables, according to Chairman M. Prasanna Kumar.
Natural gas, pushed by producers as a less-polluting alternative to coal, has also struggled to compete. Nearly 25 gigawatts of gas-fired power capacity has been idling for years, priced out by other power sources, including coal. India doesn’t have enough domestically produced subsidized fuel to run the plants and operating these assets on imported liquefied natural gas is often too costly in India’s price-competitive electricity market.
Building hydropower dams is also fraught. Most of India’s potential there is locked in the fragile Himalayan region, where frequent extreme weather events, such as flash floods, jeopardize projects. The risks have galvanized local opposition against large dams, delaying plans by years and adding to costs that have rendered many of them unpalatable.
Nuclear power has seen a revival in many parts of the world for its low-emissions energy. But there, too, the industry in India has moved too slowly to make a mark and questions about safety persist. The nation’s nuclear liability law holds vendors and suppliers responsible for accidents. Many are still haunted by the Bhopal gas tragedy of 1984, which killed thousands of people exposed to toxic chemicals.
Consider Kudankulam, about 90 miles south of Tuticorin. The site hosts two reactors of 1 gigawatt each and four more are being added. In the nearby village of Idinthakarai, 52-year-old Mildred, who goes by one name, has been at the forefront of protesting the plant’s construction. She’s traveled across the country to discuss the risks of nuclear energy.
“Why can’t these be our main source of energy?” the activist asked on a recent day, pointing to a few rotating wind turbines near her home.
In 2008, India struck an agreement with the US to share nuclear technology and fuel, clearing the runway for new projects. India has also signed deals with foreign reactor suppliers, including General Electric-Hitachi, Westinghouse Electric Corp. and Areva SA, which later transfered the project to state-run peer Electricite de France SA. GE-Hitachi has since backed out, citing the liability law.
In the western state of Maharashtra, India had planned to build the world’s largest nuclear power plant, a mammoth 9.6 gigawatts facility near sprawling Alphonso mango orchards.
But locals resisted selling their land when Kiran Dixit, then an executive director of the state monopoly Nuclear Power Corp. of India Ltd., visited the area.
They thought prices were too low and worried that the plan would harm the livelihood of fishermen and the mango trees. The company tried to put those fears to rest and the land was eventually acquired, Dixit said. Still, the Jaitapur project has yet to significantly break ground as the two sides continue to discuss terms of the deal.
The increasingly hopeful economic story of 2024 so far is that of a world headed for a soft landing. Unfortunately that same world is also becoming more dangerous, divided, indebted and unequal.
The reasons for short-term optimism are plain. A resilient US economy has defied expectations that the Federal Reserve’s barrage of interest-rate hikes would induce a recession. The UK—which dipped into a downturn at the end of last year—is already growing again, and Germany’s industrial sector is showing signs of a turnaround. Even in debt-hobbled China, domestic tourists spent more per trip over the Lunar New Year holiday than in 2019 for the first time since the pandemic, and the nation’s factories are humming a little more loudly.
