It is not often that one can confidently claim that a single remedy could make billions of people around the world significantly better off; do so in a durable and mutually supportive manner; and thus improve the well-being of both current and future generations. Yet that is the case today.
The remedy I have in mind, of course, is faster economic growth—the one thing that can raise living standards, reduce excessive inequalities, improve job prospects, alleviate trade tensions, and even moderate geopolitical pressures. And most forecasters—including the International Monetary Fund and the World Bank—are now predicting that global growth will pick up in 2014, and that it will be more balanced among the world’s major economic regions.
Such forecasts reflect three welcome developments. For starters, Europe will exit recession, with the peripheral economies benefiting from the strongest relative improvement in growth prospects. Meanwhile, 3% annual GDP growth is no longer out of reach for the United States. And emerging economies will be anchored by China’s slower but still-robust 7% annual growth.
But, while the prospect of faster global growth is indeed good news, especially given the still-high unemployment in many countries and the associated pressures on social safety nets, it is too early to celebrate. There is a risk that, by tempting policy complacency, this year’s economic upturn could end up being counterproductive.
This is not because the predicted acceleration in growth is still quite modest. After all, even a limited uptick can make a significant difference if it is part of an encouraging medium-term growth dynamic. Rather, the risk lies in the manner in which this growth is likely to materialise—namely, by depending too much on old and exhausted growth models, rather than by comprehensively embracing new ones.
In Europe, growth this year will largely reflect the impact of financial stabilisation, not deep structural reforms. With interest-rate spreads having compressed sharply, and with the threat of a meltdown averted, both domestic and foreign investors continue to return to peripheral economies, thereby alleviating severe credit rationing. That is certainly good news, especially if the source of stabilisation is shifted from the European Central Bank’s unconventional policies to more durable endogenous balance-sheet healing among a broader set of financial institutions, non-financial firms, and households.
But few of these economies are prepared to embark on the type of internal reforms that promise sustained high growth rates and a substantial reduction in unemployment, which has been at alarming levels