I must have had a hard week, since I find myself leaning more and more on Joerg for inspiration. But I really do think he has a good point. Structural reforms are being converted into something quasi-physical, that need to be handed round and round...........and round. Apart from making ourselves all extremely dizzy, isn't there something rather self-defeating in all this. Stephen Roach sums the problem up rather nicely:
Now one of the problems I think many of us (even those of us who consider ourselves 'admirers') have with Roach are those little 'slight of hand' arguments he wheels out from time to time. One of these is the 'world GDP' argument (for new readers, I think 'world GDP' is a nonsense concept: ie it doesn't mean anything). Another is the idea that protectionism caused the great depression (which as Eddie keeps pointing out is just plain false). Now we have another one: that the road to sustained economic growth rests almost exclusively on a foundation of sustained productivity enhancement driven by structural reforms.
To the extent that the road to a renewal of economic growth rests on a foundation of sustained productivity enhancement, market-based reforms become an essential ingredient of the global growth equation. Primary focus on the rhetoric of currency policies deflects attention from this critical objective.
It’s not hard to understand why politicians and policy officials would rather turn their attention elsewhere. The structural reforms required to sustain productivity-led growth are often the toughest medicine for any economy to take. That’s because they usually entail a reworking of social contracts between governments, businesses, and workers. As such, structural reforms can threaten deeply entrenched conventions of job and income security -- threats that have enormous social and political implications. In light of these severe consequences, there is a natural inclination to avoid reforms. Yet in the end there is no other choice. It takes courage and vision to look through the short-term pain and see the long-term gain. In my view, it also takes pressure -- pressure that leaves an economy and its leadership with no option other than reform. To the extent that a strong currency achieves such an outcome, that is a good thing.
Source: Morgan Stanley GEF
Right and wrong. Right, in that productivity is a good thing, and if you can increase productivity by moving your economy out of agriculture and into, say, industry (think France and Japan in the 70's and 80's) then you can obviously live better, or if you can move out of industry into high-end services then ditto. But, and here is the big point, if you move into what are intrinsically low-value labour-intensive services, but gain the productivity by everybody running faster, then what exactly have you gained? Roach is also passing the white rabbit quickly from one hand to the other when he insinuates that recent growth has come mainly from increased productivity: in fact recent growth has come mainly from two sources, increasing the level of 'participation' in the economy (whether through more women working, or because we have a higher proportion of people in the 16 - 60 age group) or from increasing the quantity of capital in play (ie either using more labour or using more capital). So in one sense economic growth depends on imagination and creativity: using our inventive capacities to find ever newer ways of creating wealth and well-being. My real problem comes when Roach starts to talk about 'severe consequences' and 'threats' to income and security. 'Good' productivity doesn't necessarily have to be tough medicine: whilst trying to defend unproductive jobs is. I have just spent the week (virtually speaking) way down south of the Rio Grande. I have set up what I consider to be an extremely interesting working goup (of which you'll hear more later), and all without moving outside the office, except, that is, in search of coffee and light relief. None of this is 'painful'. It isn't painful because we're doing more for less. But too many of the structural reforms involve doing the same for more (effort): I personally don't see what this has got to do with growth. We are going into a difficult adjustment period there is no doubt about that. In view of the sacrifices we may all be called upon to make, maybe it would be better if we were all a little clearer about why we are doing it.