In theory, secular stagnation refers to the economic condition plagued by low growth over a long period of time. This phenomenon can be witnessed in mature and developed economies, such as that of Western Europe and North America. Different causes have been ascribed to this phenomenon, and in light of the recent COVID-19 pandemic, the underlying economic/social condition in the developed world presents an opportunity to examine the theory.
Shrinking middle class, wage stagnation, lower productivity and competition from the developing world have given rise to xenophobia and anti-immigrant sentiments. Immigrants used to be the powerful force that could replenish the lackluster workforce, but with nationalistic leaders demagoguing the public grievances, an atmosphere of fear has been created, leading to less global migration coupled with backlash against globalisation
Here, I will examine four parameters, namely, income/wealth inequality, lower productivity growth, demographic shifts and lack of innovation as the major contributing factors to secular stagnation.
It is no surprise that the world has witnessed unprecedented amount of wealth concentration in the last 50 years. Ten percent of the US population has close to 70 per cent of the nation's wealth. This inequality has only been exacerbated by the rise and reliance on information technology and the knowledge economy, where data seem to power the economic engine. Ubiquitous technological companies such as Apple, Google, Amazon and Facebook dominate every sphere of modern life, and it is mind boggling that these companies employ less than 1 per cent of the workforce. With this big disparity in income and wealth, persistent lack of aggregate demand is understandable, because 5 to 10 percent of the population -despite their opulence - cannot create enough demand to maintain prolonged period of economic growth. The result is secular stagnation.
This wealth inequality can also be vividly seen in the last 10 months during the pandemic where the wealth of the rich has appreciated substantially.
With the pandemic bringing the entire economic to a stand-still, affluent people's only avenue for investment was the capital and equity market. No surprise that business tycoons, such as Jeff Bezos and Elon Musk, have gotten richer during the pandemic. As such, wealth and income inequality have led to the condition of secular stagnation, which has been exposed by the pandemic that has disproportionately affected certain segments of the population.
Technology has a profound impact on the way we work and live our lives.
However, this enhanced productivity driven by technology has not transferred to the general population.
Middle class size and income are shrinking, leading to lower productivity and lower economic growth. In the United States, high-school dropout rates, drug and alcohol addiction and mental illness are on the rise while jobs that pay middle class wages are declining. The shut-down of manufacturing plants across the Midwest in the United States is a microcosm of the socio-economic condition of the developed world. This lack of productivity growth is another fundamental characteristic of secular stagnation prevalent in the mature economy.
Other than the direct public policy, innovation is one of the contributing factors that can have a real impact on the size and shape of the middle class as well as productivity. Unfortunately, in the developed world, innovation seems to cluster in one area, namely, information technology. It has provided a better and faster way to communicate, but children's math and science scores, reading and writing ability are falling.
Quality healthcare is out of the reach for millions in the US. It used to make bold decisions, such as landing man on the moon, but it has given up on such missions. Lack of innovation and over reliance on cheap labour of developing nations has stagnated the economy.
Other than the United States, most of the developed world can be considered as a "welfare state" with declining population growth. These generous welfare states have relied on the future generation to sustain their social programmes, but with declining population growth, they do not have a sufficient tax base to maintain these programmes. Shrinking middle class, wage stagnation, lower productivity and competition from the developing world have given rise to xenophobia and anti-immigrant sentiments.
Immigrants used to be the powerful force that could replenish the lackluster workforce, but with nationalistic leaders demagoguing the public grievances, an atmosphere of fear has been created, leading to less global migration coupled with backlash against globalisation.
This chain of events has further propelled secular stagnation.
Stagnant economic growth in the developed countries has forced the world economy to look to emerging nations like China and India to move the global economy forward.
Nepal can indeed adopt policy prescriptions from these two giant neighbours to prosper. They are: Keep "technocrats" in the country by providing handsome salaries or give them incentives to return. The world economy is going to be driven by "Artificial Intelligence", and data scientists and people with math and science skills will be highly valued in this AI future.
Don't rely too much on remittances from the Gulf countries. In an AI powered economy, oil can soon be an obsolete commodity, and jobs in the Middle East will dry out. So build human capital by providing vocational education and training to power the global economy locally.
Localise the innovations coming from China and India.
China became an economic giant by copying the West, however, they did one thing different: they localised what they copied.
Chinese do not use Google, Facebook, Twitter or Amazon, nevertheless, they have an equivalent of almost everything found in the West. Rather than being a bystander during the secular stagnation of the developed economies, Nepal can be proactive and power its way towards prosperity by leveraging its geopolitical proximity with India and China.
Pathak is education management consultant at Islington College
A version of this article appears in the print on March 11, 2021, of The Himalayan Times.