The OECD Observer
Summer 1999, No. 217/218

 

The future of the global economy: towards a long boom?
by Riel Miller

 

The world stands on the threshold of a tantalising opportunity—the possibility of a sustained long boom over the first decades of the next millennium. It is an opportunity we should not miss.

Long booms are exceptional events. There have been relatively few in the history of human economic development. Two rapid growth periods of the last 130 years—one in the latter decades of the 19th century and the other in the period after the Second World War—made major contributions to lifting the long-run historical average to a higher level. The anatomy of previous long booms reveals two basic characteristics. The first is that a boom’s above-average pace of development tends to be part of a longer, century-spanning flow. This is a distinct phenomenon not to be confused with shorter business cycles that fluctuate up and down around the historical trend.

The second feature of a long boom is the coincidence of diverse forces which work together in a specific historical conjuncture. Most recently, this occurred during the 1950s when the post-war reconstruction boom coalesced around the diffusion and development of innovative technologies, advanced methods of mass-production as well as new economic and institutional frameworks. Such a constellation of forces helps to spark and sustain the unusually fast rates of socio-economic change and productivity growth that characterise a long boom.

 

Harmony and dissonance

Not necessarily. Certainly, strong growth in investment, in the capabilities of the labour force and in trade are crucial for very long periods of sustained economic development. But the dynamic element that drives change forward is the systemic chemistry that either catalyses the process or stifles it.

History has cast the role of system functionality or dysfunctionality into stark relief. The dire consequences of systems failure are evident, for instance, in the demise of Soviet command planning or the post-1970s “debt crisis” which plunged many countries into even deeper poverty. On the other hand, system functionality normally brings immense benefits. This can be seen in the convergence of income levels between North America, Europe and Japan, and the impressive economic take-off of many Asian countries over the last two to three decades.

What are the ingredients of a functional system that allows it to militate against stagnation and maintain its capacity to change over time? The answers can be grouped into three areas. First, there are the aspirations and imperatives that emerge when democracy and a competitive market place are allowed to develop together. Second, there is the capacity to innovate and adapt that can flourish only when there is pluralism, transparency and openness. And third, there is a whole range of cultural values, such as a respect for both civil liberties and social obligations, which underpin the constant search for ways of balancing co-operation with competition, security with risk taking.

Of course, systems that are hierarchical, closed and intolerant are capable of short bursts of development, even over several years. This is particularly so if the technological, organisational and social structures are imposed from above, for example, during wartime, or during a period of forced industrialisation. But, as the record this century shows, these are not dynamic systems capable of sustaining long-run economic development.

The fact that some systems fail does not mean that all systems must be the same or that functionality can be assured by clinging to what worked in the past. The ways of sustaining long-run economic dynamism change over time. The 19th century’s rather narrowly defined democracies and trading institutions offered tremendous scope in that era. The same can be said of the organisations of mass production, mass consumption and mass government that have dominated the 20th century. However, these institutional and organisational forms are hardly adequate to the conditions and tasks of the 21st century, when meeting a growing diversity of demand will mean encouraging an ever greater diversity of supply. That, in turn, depends on more initiative, customisation and a further relaxing of centralised controls.

Sustaining the prevailing tide of long-run economic dynamism is a necessary, but not sufficient, condition for sparking a long boom. A confluence of specific technological, economic and social factors will have to fall into place to push the global rate of per capita income growth into the 3% and above range of a long boom. To reach this target over the next few decades, sufficient progress will have to be made in three critical areas: the knowledge society; integration of global markets; and environmental sustainability.

Regarding the first set of forces, the transition to a knowledge economy and society, there is a close parallel to the powerful growth-inducing impact of this century’s development of mass production, mass consumption and mass government. In the 21st century, a shift to an economy dominated by the production and consumption of intangibles, such as the trade in know-how and ideas, could spur the above-average growth rates of a long boom. The more difficult question is whether or not this catalyst will be sufficiently strong both to drive change forward in as rapid and diffuse a manner as possible and to overcome any constraints on the way. Just the prospect of laboratory breakthroughs and product innovations offers no assurance of wide diffusion of new technologies nor the equally important reorganisation of the ways in which people work and live.

Momentum for change does appear to be building in several areas. With the explosive growth of the Internet and electronic commerce, attention is now turning to building the frameworks needed to enable a deeper and faster transition. The global infrastructure for overcoming inadequate privacy safeguards, payment systems and intellectual property laws is now being designed. Should this infrastructure fall into place, there is a good chance that decentralised market competition and knowledge diffusion will accelerate the transition process. However, improving the ease with which people and firms everywhere can enter markets—both on the demand and supply sides—is only part of the solution. Constraints, such as limited access to easy-to-use, “appropriate” technology and out-dated methods for improving, assessing and attributing value to human capital threaten to slow change or render it too shallow. The intangible economy’s radically new organisational patterns of production, consumption and human settlement will take hold only if people are helped to overcome their fear of both unfamiliar technology and the prospect of new, possibly disruptive economic and social changes.

The second set of developments that could power a long boom spring from the possibility of an accelerated and much fuller integration of global markets. There is good reason to believe such integration would bring positive results. After all, the creation of national or regional spaces for the free flow of goods, services, finance and technology have had telling effects on long-term growth. Extended world-wide, such integration offers huge scope to improve both the efficient allocation of resources and the competition of ideas that are the key ingredient of knowledge societies. But numerous constraints block the way, from having to use existing frameworks for resolving trade disputes, to having to reform or invent institutions that can manage the volatility of global financial markets.

In addition, the rapid and much fuller integration of global markets required for a long boom is unlikely to be politically feasible without mechanisms for compensating losers and introducing minimum standards regarding both human and workplace rights. Here the notion of social values plays a decisive role. Negotiations to merge markets and establish much higher degrees of transparency swiftly confront issues like the value attached by many to preserving national sovereignty or the willingness to tolerate other people’s social norms.

The drive towards environmental sustainability is the third factor that could contribute to sparking a long boom over the first few decades of the next century. The job of lightening tomorrow’s ecological footprint of wealth creation compared to today’s industrial societies could, if the policies are designed appropriately, spur the rapid development of both the intangible, environmentally benign, side of the economy, and improve the eco-efficiency of the more traditional forms of production and consumption. Such policies could help to accelerate the diffusion of new technologies, like hydrogen fuel-cells that can generate electricity for both home use and transportation needs. Perhaps even more importantly, they could help to paint tomorrow’s long boom green by making good use of the opportunity afforded by new technologies to reorganise economic and social life.

On the other hand, moving aggresively towards an environmentally more sustainable economy and society might turn out to be more of a constraint than a catalyst. Using economic incentives to change consumption and investment behaviour may be highly effective, as experience during the oil shocks demonstrated, but the adjustment costs are often prohibitively high. These costs could end up compounding the drag exerted by trying to use global institutions that are still somewhat immature for the daunting tasks of the future. Those tasks could include negotiating the attribution of rights and the redistribution of income as part of a new form of global ecological citizenship.

 

Provoking a long boom

The key factors needed to spark a long boom do indeed appear to be present today. However, its prospects depend first, on the condition of the underlying systemic “motors”, such as the competitive markets, social openness and political democracy that create the foundations for long-run economic dynamism, and second, on the extent to which the balance between historically specific catalysts and constraints—of the knowledge society, global markets and environmental sustainability—can provide the necessary fuel. Provoking a long boom will be contingent on inducing as many of the available catalytic forces as possible and making them work together. In concrete terms that means coherent and integrated policies to accelerate the emergence of the knowledge economy, globalisation and a new environmental sustainability. It also means making the best of the possibilities open to humanity on the eve of the 21st century.

Unfortunately, opportunities are not always grasped. There is now a rare chance to realise a period of rapid, widely shared growth and to reverse the trends towards deepening inequality and exclusion that have marked recent decades. These are two very good reasons for making the exceptional economic and social policy efforts required for the long boom to become reality.

 

Bibliography

Schwartz, Peter and Leyden, Peter, “The Long Boom: A History of the Future, 1980—2020”, Wired Magazine, July 1997.

21st Century Technologies: Promises and Perils of a Dynamic Future, OECD, 1998.

The Future of the Global Economy: Towards a Long Boom?, OECD, 1999.

Maddison, Angus, Monitoring the World Economy, OECD Development Centre, 1995.