World Economic Growth Won’t Recover: It’s Slowly Down From Here

Europe and the US have been experiencing very slow growth since the Global Financial Crisis. Japan has had it for decades. Those expecting a return to sustained fast growth are in for a shock. These are early signs of the new normal, a long term trend towards slow growth. Here’s why.

Since 1900 world GDP has exploded as never before in history. Rapid growth has occurred in both the amount that each person produces and in the population available to do the producing. Billions of people have moved out of grinding poverty and experienced opportunities on an unprecedented scale.

World GDP

Source: http://delong.typepad.com/sdj/2014/05/estimates-of-world-gdp-one-million-bc-present-1998-my-view-as-of-1998-the-honest-broker-for-the-week-of-may-24-2014.html

Over a still longer horizon, say 500 years, growth has generally accelerated over time leading to the impression that still more amazing increases can be expected to follow. Unfortunately we cannot expect growth to continue at the rates we have seen in recent history. The rational expectation is that in the period to 2100 growth will slow gradually, but with dramatic cumulative effect.

The GDP of a region can be broadly seen as the outcome of 2 factors. The economic potential of a population and area determines a kind of upper limit on output. The fraction of this potential which will be achieved largely depends on the degree to which people are allowed to produce free from constraint and confiscation.

Economic Potential

The amount that could be produced in a region and by extension in the world is determined by physical factors. Who inhabits the area? What level of natural ability and inclination do they have to produce? What natural endowments do they have to work on? What techniques are available for transforming those natural endowments into finished products?

Population

More people can produce more things. We should expect an increase in population to result in an increase in output, all other things being equal.

Genetic characteristics

Each person has a different genome which influences their inclination and ability to produce. The more able and willing a person is to work and produce output the more that person will produce.

Natural endowments

Clearly the available land and resources is an important determinant of possible production. It is easier to produce food in a larger area of arable land, it is easier to produce oil if there are more and better oil resources and so on.

Technology

Technology is the stock of production methods available to a population. Technology can increase through discovery but is rarely lost. Consequently technology is generally a cumulative variable. In the modern world technology is available to all regions of the world almost immediately and used to the extent that local potential and conditions allow.

Why this means growth will slow

During the 20th century global output increased by over 37 times, per capita income by nearly 10 times and population by almost 4 times. A similar tempo of growth has continued in the first years of the 21st century. The obvious role of population increase gives the first hint of why growth cannot continue as it has since 1900.

Population

Dramatic increases in world population in the period since 1900 will not be repeated. For reasons which will become apparent later we look at UN population forecasts for the zero migration scenario.

population

World population of people in their most productive years (taken here as 25 – 49) over the period to 2100 is forecast to increase by 28 per cent or about 0.3 per cent each year. This compares poorly with the 1.4 per cent average rate during the 20th century. Further consideration of the expected quality of the population of the world in 2100 provides further reason for pessimism.

Genetic characteristics

One important genetic characteristic correlated with national per capita output is intelligence, specifically the proxy variable IQ. Positive influences on output occur both for that individual and for the people who interact with that person.

Intelligence is unevenly distributed between countries. The map shows that the high IQ countries broadly comprise the present developed countries plus China. Some minor exceptions include North Korea, Vietnam, Argentina, Uruguay and Chile.

IQ_by_Country

Source: http://commons.wikimedia.org/wiki/File:IQ_by_Country.png

Turning to the map of GDP per capita the close relationship is immediately apparent.

GDP_(PPP)_per_capita_by_countries

Source: http://en.wikipedia.org/wiki/Purchasing_power_parity

The first group, developed countries, have high IQ and high per capita GDP. The second group have high IQ’s but were (or still are) communist countries comprising Eastern Europe, Russia, China, North Korea, Mongolia and Vietnam. These countries have high potential GDP per capita populations but were constrained by government policy and remained relatively poor. Most of those countries have been catching up rapidly as they move away from the command economic systems of the past.

The rest of the world mostly has low average IQ’s and low average production. Some unevenness exists in the GDP per capita of this group accounted for by three main factors.

1. Differences in the average IQ of the populations, for example Africa is poorer than South America because it generally has a lower average IQ.

2. Exceptional contributions by a high IQ minority population, for example the Chinese in Malaysia and Europeans in South Africa.

3. Valuable resource endowments, for example oil in the Persian Gulf and diamonds in Botswana.

The good news from this pattern is that barring serious impediments such as the reestablishment of communist governments or serious wars we can expect the remaining high IQ countries to converge with the existing developed world.

The rest of the world cannot be expected to achieve the same feat and will remain poor due to the limited intelligence of the people in those countries. These parts of the world comprise less than a third of current world GDP even though they contain over 60 per cent of the working age population.

If we turn back to the UN population forecasts we can see that there is a quality issue with the expected population growth to 2100. The use of zero migration forecasts allows us to see the full extent of the population crash expected in the high average IQ groups.

population by region

The populations which presently have high IQ’s and high potential GDP per capita levels will fall by over 40 per cent. Meanwhile the populations presently in the low IQ regions will increase by over 70 per cent. The result will be a huge drag on the rate of growth in GDP per capita.

This process cannot be prevented by immigration. Immigration can move the productive and unproductive people around the world, but it cannot change the underlying populations or the aggregate capabilities of the people who comprise them.

Natural endowments

Despite environmentalist claims to the contrary there is no looming general shortage of land or resources to be expected in the near future. Natural endowments will remain sufficient to allow populations to achieve their economic potentials.

Technology

There is little reason to expect technological advance to contribute more or less to GDP growth than in the past. This is subject to a high degree of uncertainty in both directions.

What is the chance this forecast will turn out to be correct?

This post assesses factors which limit world output in an optimistic future. Obviously world GDP and population could be considerably lower than this analysis indicates if problems such as wars, natural disasters or political craziness reassert themselves. Since these factors have a small limiting effect on output now compared to previous periods of history any changes are likely to be for the worse.

Accurate, long term forecasts of changes in technology are all but impossible. Large positive impacts from changes in technology can be imagined, including:

  • robotics and automation
  • healthy life expectancy increases
  • reproductive technology
  • human genetic engineering

It is equally possible to imagine technological advance stagnating causing further slowing in growth.

Demographic changes are the main factor leading this post to predict a slowing of economic growth in the period to 2100. Changes in the size of the workforce are relatively easy to predict in the medium term. Since current births are already known, we already have an upper bound on workforce populations till at least 2050 and to some extent beyond. To invalidate the general prediction of slower economic growth to 2100 would require implausibly fast and widespread changes in fertility.

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3 thoughts on “World Economic Growth Won’t Recover: It’s Slowly Down From Here

  1. I’d prefer to see evidence to back up the idea that that “natural endowments” will be sufficient to meet both population growth and increasing demand. These do, after all, provide one of the more obvious limits to growth that are out there. Whilst I am sure that improving technology, farming practices, general market forces etc. will react to mitigate the impact of this, I am concerned that we cannot do this without making some pretty radical changes to the way we live and order society, if we want as many people as possible to have a reasonable standard of living and not completely screw up the entire biosphere. And again, if fertility is to increase just for the sake of maintaining economic growth, this will place an additional population constraint.

    Unless and until it becomes viable to exploit space (and the input costs are very high) then we are ultimately stuck with a finite planet with finite space and resources.

    Also whilst poverty/underdevelopment might be in part caused by low IQ, could it not be the cause of low IQ? Living more technologically advanced industrial societies (or any advanced civilization), for one thing, perhaps puts selection pressure on high IQ as a means of ensuring survival and social/reproductive “success”; you need a rather different set of cognitive abilities than that IQ measures in a more “primitive” environment. Add to that factors like poor education (training the mind) and diet (developing the brain). I think this might demonstrate why the likes of East Asia tend to be slightly higher than the West- they have had advanced civilization for continuously longer than Europe, and seem to place a much higher value on education.

    I suspect there are other reasons, besides this and what you have highlighted, that growth may stall. It seems the highest-growth countries are those that are developing. Poor people who have the opportunity to improve their standard of living are both a good potential source of demand, and are willing to work for much less pay and conditions to get it. But, assuming there is enough negotiating power, wages rise and, as standard of living improves, people get to a point where they are at least reasonably satisfied and are less willing to work hard for whatever pay and conditions the market can support (or at least what those at the top want the market to support). So, you’re going to get to a point where both productivity and demand are going to fall off, and productive jobs disappear to wherever labour is cheaper. I understand the real driver of wealth creation is the productive sector.

    (Note I’m no economist so anything I say is just my surmise- feel free to correct my mistakes if you know any better!)

    Assuming high levels of growth are unsustainable, one must ask if there are any alternatives to running an economy in such a way that growth is required.

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    • The idea behind the writing was to point out that even under the optimistic scenario where we don’t fall prey to large scale war, disease, disasters, socialism, or other disasters the demographic situation STILL won’t allow us to repeat the economic growth success of the last 100 or so years.

      I didn’t want to get too much into the details of resources, technology and so on because it would have distracted from what the article aimed to draw attention to and because I want to keep my articles short enough for a person of normal patience to actually read. Not to mention short enough for me to enjoy writing!

      I appreciate the well meant and thought out comments, by the way.

      Like

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