Economic growth in the long-term

As a guest of the Turkish Industrialists and Businessmen’s Association (TÜSİAD) and a prominent specialist on economic growth theory, Professor Robert J. Gordon from Northwestern University gave a remarkable conference last Saturday at Kadir Has University.
Former Turkish Economy Minister and former Word Bank Vice President Kemal Derviş, who led the important economic reforms implemented after the crisis of 2001, made interesting comments on Turkish economic growth problems. This is, for sure, an occasion to revisit the issue of long-term economic growth. Professor Robert J. Gordon Professor Gordon recently published a hotly debated article in which he asks if economic growth in the US is over (“Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”). The paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. Income per capita growth that was nearly stagnant accelerated in the 18th-century UK thanks to the First Industrial Revolution, which was essentially based on a revolution in production processes and transportation brought about by the advent of steam energy and mechanization. This first revolution was followed by a second in the latter half of the 19th century, led by the US. This Second Industrial Revolution was based on electricity and the internal combustion engine, to mention the two major innovations. Most of the durable consumption goods we continue to use nowadays were created in the 20th century in the US and then spread throughout the world. These new goods not only tremendously improved human welfare but had the decisive side effects of pushing capital accumulation, employment and productivity gains up through many channels. Gordon pointed out how, for example, the participation of women in working life jumped thanks to the availability of household goods. From 1891 to 2007 yearly average per capita income growth was 2 percent in the U.S. Until the 1970s this growth exceeded 2 percent and was based mostly on rising labor productivity. After 2007, productivity continued to increase but at a slower pace, while working hours started to decrease, canceling out some of the productivity increases. In the coming decades structural trends, Gordon’s headwinds, will further compensate productivity gains, which he says are already faltering. Gordon listed his headwinds and gave estimates on how much each will undermine the long-term trend of 2 percent growth in per capita income. Four of those headwinds are demography, education, inequality and debt. The population is aging and the rising participation of women in the workforce hit its peak at 58 percent (in the US) in 2000 and then began to decline. These two factors will cancel out the contribution of employment to economic growth in the future. Educational attainment, which has increased greatly in the past, will also peak in the future. Income inequality is dangerously increasing. According to Gordon, during the last decade individuals at the bottom level of income distribution got next to nothing from productivity gains, while individuals at the top took more than half of the added income. Last but not least, disposable income has been growing more slowly than debts for years, increasing the debt burden on households. This burden also has its proper limitations. For each of these headwinds Gordon subtracts a few fractions of a percent from the long-term average of 2 percent per capita income growth. He comes to the conclusion that average growth will fall under 1 percent in the coming decades before hitting zero in the 2050s in the US. This is certainly bad news for the US, which sets the limits of the world’s technological frontier. If humanity is unable to realize a new technological revolution, this frontier will cease its outward movement. Countries like Turkey, however, that remain far behind in technology, may still hope to catch up at, of course, various speeds. Derviş, after explaining that he isn’t as pessimistic as Gordon regarding the difficulty of pushing the frontier forward, focused on our basic problem: How fast can Turkey close in on this frontier? In other words, what could our growth rate be in the future? We already know the answers: We have to increase our domestic savings and realize productivity-enhancing reforms. But the core of the problem is that we, Derviş included, don’t know how to do it.