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Irrational Pessimism

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13 August, 2011
By: John Hancock
Senior Counsellor at the World Trade Organization

Chaotic stock markets, spiralling debt crises, weakening growth, rioting in the streets – the steady drum beat of bad news has been so overwhelming lately that it’s easy to forget that we are likely entering the most dramatic period of material progress in human history.

Even amid the current gloom and doom, the International Monetary Fund cautiously forecasts 4.3 per cent global growth this year and 4.5 per cent next year, with rates steadily climbing over the coming decades. That compares to an average annual global growth of just 0.5 per cent in the 18th century, two per cent in the 19th and early 20th centuries, and 3.5 per cent in the “golden years” after 1945. In other words, world growth rates are not only increasing, but also accelerating – with profound implications for living standards, education, health, democracy, and world peace.

There are three fundamental trends that are likely to make the long-term future considerably brighter than most of us seem to believe.

First, the developing world is finally experiencing the industrial revolution – almost three centuries after its first sparks in England – but at a far faster rate, and involving billions more people. China has grown at eight to 10 per cent a year for three decades – without interruption – recently eclipsing Germany as the world’s biggest exporter, and Japan as the world’s second-biggest economy. This alone represents the most significant economic miracle in history. India is not far behind, projected to grow at 12 per cent annually over the next 10 years. And Asia’s success is being replicated in Latin America and Africa, with these continents chalking up four per cent and five per cent growth rates, respectively, in the last decade.

Technological innovation is a second cause – and an effect – of widening growth. It has never been easier for economies to import the latest technologies, know-how, and ideas – whether from the internet, footloose multinationals, or an overseas education. Advances in – and the mass adoption of – technology drives up the pace of growth. And growth, in turn, frees up resources for more research and development (R&D) and increases the incentives for innovation. Today, leading-edge technology is still largely generated in the already-advanced and educated West. But soon, the newly wealthy, increasingly educated emerging economies will be technology innovators and leaders too – adding to the positive feedback loop that is driving technological progress.

Third, widening growth and accelerating innovation are happening because the world economy is more open and integrated than ever before – driven partly by lower trade barriers, but mainly by massive declines in transport and communications costs. For instance, it now costs less to move a container from London to Shanghai than from London to Birmingham. Despite much hand-wringing over the threat of protectionism and isolationism, the pace of globalization is actually increasing, not decreasing. Even after the “Great Recession,” world trade was over 50 per cent higher in 2010 than in 2000 – and 183 per cent higher than in 1990.

OK, you say, the developing world is booming. But isn’t that at the expense of the industrialized West? Actually, it’s just the opposite – because economic growth is not a zero-sum game. Already, western consumers have benefited hugely from inexpensive imports (boosting living standards, à la iPods and flat screen TVs) and cheap capital (which, through no fault of developing countries, encouraged us to live beyond our means). Plus, the rise of rich markets in Asia – and a vast new middle class – will inevitably spell export opportunities for the West. Fears about the loss of technology are even more misplaced. Knowledge is expanded – not reduced or lost – when it is shared. China graduating thousands of new engineers or investing massively in R&D are events to be applauded, not feared, because they represent major new additions to the global pool of creativity and innovation.

Indeed, these deep, structural trends – a rising developing world, spreading technology, and growing trade – are mutually reinforcing. Classical economists – from Smith to Malthus to Marx – worried about diminishing returns, convinced that economic growth would sooner or later level off, and that mankind would have to learn to share a static pie. But rising growth over the past several centuries – as well as current trends – suggested a world of increasing returns, an economic pie that grows ever bigger and richer.

Already, the impact of increased global growth is being felt in rising living standards, longer lifespans, and better education. Even the tentative signs that the world is becoming a more peaceful and democratic place can be traced, at least in part, to the beneficial effects of living in a positive-sum world, where countries no longer have to go to war to grab a bigger slice of the pie, and where billions worldwide (not just millions in the affluent West) can aspire to a better life. Isn’t that what the young women and men on the streets of Cairo or Damascus are demonstrating about?

Is this brighter future guaranteed? Hardly. Globalization is the product not of unstoppable technology, but of human choices. Uncertainty and fear generated by the unprecedented pace of change could still stop globalization in its tracks, turn us inwards, and usher in a new dark age. But while a darker future is possible, it is not probable. If the last several centuries are anything to go by, we are the luckiest generation yet – even if we don’t know it.

Photo courtesy of Reuters.

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