Wed, Dec 16, 2015 - Page 8 News List

Quest for economic growth engines

Darson Chiu 邱達生

The IMF has repeatedly revised downward its outlook for world growth since the fourth quarter last year. Economists have been stressing a “new normal” or a “new mediocre.”

Tumbling crude oil prices did not generate consumption as expected. Quite the contrary, falling energy prices have caused distortions on base effects and dragged down aggregate output growth on a year-on-year basis.

Strong growth seems unlikely for the time being.

In addition, geopolitical factors are furthering uncertainties amid deteriorating economic conditions; large nations are not showing leadership to pull the world economy along, rather they are desperately trying to cope with their own difficulties.

In the face of heavy fiscal constraints and debt pressure, extreme monetary operations, through quantitative easing, have become one of the few workable options. Overcapacity due to overinvestment at bad times has been an issue causing inexhaustible structure reforms, whereas continuous reforms have also slowed growth momentum and limited growth potential. When big players are dealing with either tepid growth or periodical headwinds, soggy demand holds back others that are closely associated with global or regional supply chains.

As every economy is specialized in specific ways, almost none are immune to shrinking world demand. Therefore, to pick one’s growth potential is no longer simply to seek the betterment of oneself, but the well-being of all.

Consumption, investment and trade are main engines that used to drive economic growth yet have seemingly lost steam in recent times. Decisionmakers are responsible for building hale and hearty environments that are able to encourage consumption, investment and trade.

Private or household consumption is the most important component of GDP. Estimates for this year show that private consumption accounts for 58 percent of worldwide GDP, 61.9 percent of Organisation for Economic Co-operation and Development (OECD) GDP and 51.5 percent of non-OECD GDP.

Despite consumption preferences and decisions being dissimilar among the nations, it is a rule of thumb that demand for consumption goods is strong in good times, whereas consumers tend to retreat in bad times. Since the marginal propensity to consume theory indicates that an increase in consumer spending occurs with an increase in disposable income, avoiding income traps is essential to support consumption. Income traps have been present in different forms: emerging economies are suffering from middle-income traps, while advanced economies are stressing high-income traps.

In addition, to escape from income traps, building sound social safety nets is also a necessary task to promote private consumption. Saving is critical, especially for developing economies when lacking sufficient social safety nets. However, high saving rates restricts other economic activities, such as consumption.

With well functioning safety nets, people will be more willing to spend.

As for investment, it is the key for growth. Besides the fact that investment is a crucial component of domestic demand, it also paves the way for supplying external demand.

Not only emerging, but also advanced economies have strived to attract foreign investments. For emerging economies, foreign investment comes with technology and the chance to upgrade economic capacity. For advanced economies, foreign investments bring in capital and job opportunities. Complicated and excessive regulations, poor infrastructure and unstable political systems are some of many reasons that could impede potential foreign investments. Hence, capacity building to create healthy environments through information and knowledge sharing among economic partners to eliminate or mitigate those unattractive factors is much needed.

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