Leaders in government, business, academia and philanthropy convene in Davos, Switzerland, this week to sort out the world’s challenges, including the lofty ambition of “reimagining growth”. But what novel approaches could stimulate long-term, sustainable growth if government finances are strained and the wildly euphoric hopes for artificial intelligence prove to be limited?
The angst around Davos is understandable. Even though equity markets hit record levels and a much-feared recession was averted last year, the global economy has lumbered at an underwhelming pace. Prospects for expansion are worryingly weak, according to the International Monetary Fund.
Risks are tilting to the downside as China struggles with deflation, India becomes a quieter tiger and the United States implements disruptive policies. Meanwhile, Europe’s flagging economy confronts populist nationalism and leadership crises. Inflation has yet to be quelled as central banks keep rates higher for longer. Inequality between the Global North and South is accelerating, with developed nations holding more than two-thirds of global wealth.
Employing fiscal policy to jump-start and sustain growth is increasingly ineffective given unsustainable borrowing at high rates of interest. China’s public debt-to-GDP ratio is estimated to have exceeded 90 per cent in 2024. In Japan, the US and the United Kingdom, that ratio was 205.6, 112.3 and 100.5 per cent, respectively.
Total public debt worldwide was projected to hit US$100 trillion, or about 93 per cent of global GDP, by the end of last year, according to the IMF. However, the burden is likely greater given large spending pressure, the optimism bias of debt projections and sizeable unidentified debt.
Keynesians might argue that fiscal and monetary intervention stimulates demand and achieves full employment, but that rationale loses persuasiveness when government borrowing is straining credulity. Fiscal expansion can have contradictory effects, hitting company profits and thus leading to a decline in both private investment and economic growth.
Governments tend to be sloppy with capital and poor stewards in shepherding investments towards the most promising ventures. China’s overinvestment in electronic vehicle manufacturing shows the perils. We should know soon whether US investments in chip manufacturing are a ruse. Decades-old models of growth are increasingly obsolete. Investment as a driver of growth has failed to deliver on its promise.
Consumer demand in China and the world’s other large economies is moderating, in part because of an ageing population and slowdowns in disposable income and wage growth. Higher costs mean people are buying more selectively, extending the lifetime of their purchases and repurposing things that once were quickly discarded.
Economic growth tied to finite resources is reaching critical limits. The global economy currently consumes resources at a rate equivalent to 1.7 Earths annually, according to the Global Footprint Network.
Four approaches offer promise in reimagining growth. The first is a focus on circular economies that reuse resources and adopt sustainable approaches to manufacturing, energy consumption, finance and society.
Reusing, recycling and other such processes can extend products’ life cycles, minimise waste and reduce environmental impact. Developing and implementing these processes can stimulate innovation and promote entrepreneurship while preserving capital that can be invested in the most promising businesses. Lower costs and higher efficiencies can help countries gain a competitive edge while raising companies’ revenues through both the savings achieved and the new income earned from refurbishing products and avoiding costly extraction of resources.
Countries and companies will become more resilient to shocks arising from supply chain disruptions and tariff levies. Some of these hopes are highly optimistic, but reducing cost margins will increase companies’ profitability and productivity, both drivers of growth.
Investing in human capital must be a higher priority. Growth cannot endure if the highly educated are a limited pool of talent. More people must have access to high-paying jobs. A study by the Centre for Economics and Business Research in 2016 indicates that human capital is nearly 2.5 times more valuable to the economy than physical assets such as technology, real estate and inventory.
Improvements in education outcomes alongside better healthcare can lead to considerably greater productivity. A more educated workforce is likelier to have high levels of savings and can prepare for long-term self-sufficiency through personal investment. The pay-off takes time, so patience must be part of any reimagining of growth.
Narrowing the gap between rich and poor countries must also happen if more vibrant growth is to supplant the current plodding pace. We cannot achieve a better future if nearly 9 per cent of the world’s population lives in extreme poverty.
Most of the world’s poorest children live in either sub-Saharan Africa or South Asia. The World Bank has found that the income gap between half of the most vulnerable 75 countries and the wealthiest economies is widening for the first time this century.
Companies and their workers must have a global vision, and developing and emerging-market countries will benefit from opening their borders to foreign investment. This means more portals for sharing advanced technologies under development by research institutions, universities and businesses worldwide. Giving the poorest countries opportunities to contribute to technological advancements will help everyone. New competitors should be embraced instead of being feared.
All these ideas need confident leaders who will take risks in a new era in which national security priorities justify trade protections and the global dialogue is more a cacophony of threats and counter-threats than one espousing solutions for the greater good. Some ideas circulating in Davos are naive, but others offer promise in recognising that collective approaches and free flows of capital are strong steps towards sustainable growth.
