THE SOURCE OF ECONOMIC SUCCESS IN THE 21ST CENTURY....EACH COUNTRY WILL HAVE TO RELY ON ITS CHILDREN’S SKILLS AND INGENUITY IN AN INCREASINGLY COMPETITIVE WORLD

A lot of attention is being given to the competition Europe and the United States will face from economic growth in Asia over the next 25 years.

A survey conducted by the World Economic Forum shows that Asia is the most optimistic part of the world about its economic future. And optimism is essential to investment!

The OECD has estimated that between now and 2060, GDP per capita will increase eightfold in India, and sixfold in Indonesia and China, whereas it will merely double in OECD countries, which include Europe and North America. This will affect the balance of power in the world. It is interesting to note that two of the top three Asian dynamos are democracies, India and Indonesia. And both of them have substantial Muslim populations.

The source of economic growth can be summed up in two words...innovation and population.

UNBLOCKING EUROPE’S ARTERIES TO RELEASE INNOVATION

If a country has an innovative and well educated population, open to trends in the global market, able to understand them and identify the needs of the world that it can meet, and with an economic and governmental structure that allows speedy allocation of resources to those needs, and  away from less efficient uses, it will have a higher growth rate.

This is why there is so much emphasis on “structural reform “ in OECD,IMF and EC advice to countries. Structural reform is designed to clear the arteries of the economy, and allow blood to flow more quickly to the activities that will yield the best return.

For example, if a country has disproportionately expensive, slow or overly elaborate legal system that will be a blockage in the arteries. If a country has disproportionately high electricity prices because it uses electricity prices to subsidise uneconomic generation for regional policy purposes, that will block arteries. Likewise if it has disproportionately costly or slow broadband communications, avoidable skill shortages, unwillingness to recognise genuine foreign qualifications, work disincentives for particular groups, or a distorted market for credit that does not favour productive activities,  all these things are blockages in a country’s economic arteries.

Such blockages can also apply at supranational level too. It has been estimated that the lack of a single market for digital services in the EU is blocking the arteries of the EU economy to the tune of 260 billion euros, the lack of a true single financial market is doing so to the extent of 60 bill euros,  the lack  of an integrated energy market to the extent of  50 billion euros, and  the lack of a single services market (including non recognition of skills certified in other countries) is blocking the arteries of the European economy to the extent of  235 billion euros.

Interestingly, a European Parliament staff paper shows that one of the slowest countries to implement the structural reforms urged by Heads of EU governments since 2011, is Germany. And one of the fastest, on paper at least, is Greece. These are reforms that Germany’s own Chancellor recommended along with her colleagues. One of the problems is the delays at the level of the Lander.

To put it all another way, and using some economic jargon, Europe has a choice. According to the EU Ageing Report, the EU can stay on its present course, and, as in the last 20 years, have a total factor productivity growth rate of only 0.8% pa. 

Or it can make changes which could lift its total factor productivity growth rate to 1.1% per annum up to 2020 and 1.4% per annum thereafter. A slow, longterm, return perhaps, but a real one all the same.  And in the long run, enough of you will be around for that to matter!

STRUCTURAL REFORMS HAVE DIFFERING POTENTIAL BETWEEN COUNTRIES

Some countries, not Ireland, have been artificially held back by top heavy bureaucracy, that prevents their societies from allocating resources to where they will get the best return.

Societies can fail to allocate resources well, or block good reallocation of resources, by political vetoes, and constitutional limits. 

The reforms necessary  include reforms to the labour market, but to a much greater extend they involve freeing up markets for the sale of goods and services, from electricity, to professional services, to government services, as I have mentioned already.

Of course, freeing up the arteries will not solve the problem, unless there is blood flow of commercial innovations based on good R and D, accompanied by an innovative and flexible culture within Government, within educational institutions and in the general population.

Between now and 2060, according to the OECD,  the countries with the biggest upside potential, for extra  growth  that might come about as a result of the implementation of structural reforms,  are China, Slovakia, Poland, Greece, India, Indonesia, Italy and Russia. 

At the other end of the scale, some countries that already have relatively efficient systems, and are  getting the benefit of reforms made in the past. These countries include the UK, Netherlands, Ireland and the USA. 

It is good that Ireland is in that position and that is an indication that the reforms we made over the last 40 years or more have yielded fruit. And this is despite the fact that Ireland still has, to a degree , many of the  rigidities I mentioned earlier, and has room to improve in those areas.  

On the other hand, other competitor countries, like China, Poland, Slovakia and Greece have even more room to improve, or  more upside potential than we do , and may thus pose a bigger challenge to us,  as soon as or if  they get their act together.

Already comparatively efficient countries, like Ireland, the Netherlands, the US and the UK,  will have to look elsewhere than structural reforms on their  own, if they are make extra gains. They will have to run faster and faster just to hold their current relative position.

STRUCTURAL REFORMS ALONE NOT ENOUGH......THE NUMBER OF YOUNG PEOPLE WILL MAKE A KEY DIFFERENCE

In every society, young people are the innovators. My own sense is that the crucial determinant, of  relative success in the 21st century as between countries, will be the proportion of young people in a country, and the relative mental agility of those young people, in comparison to those in other countries .

Their potential will be influenced by formal education, but not only by education. It will also be influenced by what happens to them as children, before they ever go to school.

Other things being equal, a country with a large elderly and middle aged population and few young people, is unlikely to produces as many innovators as a country with a large youth population. It is also likely to have more political veto points.

To an extent, each society decides the sort of future it wants to have, when it decides how many children it will have. Societies in many European countries, including Germany, Spain, Italy and many East European countries have decided to have few children, and that is a choice they have made, perhaps unconsciously, about the future profile, and potential, of their country. 

For example, partly as a consequence of differences in past birth rates, the OECD calculates that from 2018 to 2030, Ireland’s potential employment growth rate will be 1.2% per annum, and France’s will be 0.2%.

In contrast, Germany over the same period, will experience a potential employment decline of 0.6% a year, and Finland faces a potential employment decline of 0.2% per year. 

These differences partly explain why Germans and Finns see limits to their ability to bail out other countries, like Greece. They know will soon have fewer people at work, supporting an increasing number of retirees, and they will want to hold their money back for that. Unfortunately for it, Greece has a similar problem of an ageing and diminishing workforce, and an increasing elderly population.

Pensions are already 14.5% of Greece’s GDP, 13.8% of France’s GDP and almost 11% of Germanys’, as against just a little over 5% of  GDP in the UK and Ireland. That difference explains a lot, at least as much as the supposed doctrinal differences between German “ordo-liberalism” and  Anglo Saxon Keynesianism!

It is true, as Keynesian economists argue, that coordinated demand stimulus, by countries that can afford it, would help Europe’s economy achieve its jobs potential, without risk of inflation, and that can  come from countries whose fiscal positions are strong, but the judgement as to which European country can do that, has to take some account of differences in the ageing profile of each country.

Incidentally these differences also illustrate the foolishness of anti immigrant sentiment in Germany.  Germany’s 6.6 million immigrants paid in 22 billion euros more in taxes and contributions, than they took out in benefits, and some of that surplus is helping pay the pensions of native born Germans. I expect the same may apply in France.

In fact, the EU Ageing report, to which I referred earlier, estimates that 55 million immigrants will have to come into the EU by 2060, to make up for the decline in our native born workforce because  past decisions on family size. That can change, of course.

Meanwhile, Africa’s population will have increased by 28% by 2060 and Asia’s population will have slightly declined.   

EUROPE’S YOUTH PROBLEM........A WASTED GENERATION?

In the next fifty years, on unchanged present trends, the overall working-age population of Europe will drop considerably, from last year’s peak of about 300 million to 265 million. This will be a significant blow to nearly every aspect of the Eurozone economy.

At the same time, the old-age dependency ratio--a fraction or percentage expressing the ratio of residents over the age of 65 to those under that age--will rise from 28% (recorded earlier this decade) to a staggering 58% by 2060.

The causes of this challenge are in Europe are manifold: declining fertility, advances in old-age care, the residue of baby-boom demographics. But the impact will be serious.

This is made even worse by the fact that so many of today’s youth in Europe are unemployed. The longer they are unemployed, the less relevant their skills become, and the harder will it be for them ever to get a well paying job. Their life time earning potential is being radically diminished.

The experience of long term unemployment is devastating.  That is a huge medium term problem. I heard a representative of the Gallup polling organisation, who do in depth polls that the experience of long term unemployment was worse, for the person involved, than of opinion and studies of public psychology, say that his organisation’s finding was the death of a spouse.  Imagine what that also does to future earning potential and self confidence!

Mario Draghi has recognised this, as the central European problem of today.

He said in his  speech at Jackson Hole last year

“The stakes for our monetary union are high. Without permanent cross country transfers, (which he did not expect will happen), a high level of employment in all countries is essential to the long term cohesion of the euro”

I would emphasise two words in that sentence..... “all” and “essential”.....

“ ALL” countries in the euro must have a high level of employment. 

And the head of Europe’s Central Bank says this is “ESSENTIAL”  for the euro.

Not the sort of language you would expect from a Central Banker of the subject of employment, which shows that solving Europe’s unemployment problem is essential to the survival of the euro, and thus the avoidance of immense financial instability and wealth destruction, that would flow from a break up of the euro.

Even economists, like Martin Wolf, who opposed the creation of the euro, argue that its break up would be an unmitigated disaster at this stage. The break up of the euro could herald an era, between the countries now in the EU, of  arbitrary savings destruction, of national protectionism, of competitive devaluation,  and  of mutual litigation and recrimination, that would destroy the interdependence that has allowed the European Union itself to be a structure of peace in Europe for 60 years. 

We would not be going back to the 1980’s, but to the 1930’s. 

And Mario Draghi has linked finding a solution to high unemployment is some European countries(like Greece and Spain) to finding a way to avoid that. That is what is at stake.

TODAYS PRESCHOOL CHILDREN WILL HAVE A HEAVY ECONOMIC BURDEN TO BEAR......, 

But, in the longer run, we have another problem. We will soon not have enough young people at all in Europe.

From 2030 on, Europe’s working age population will decline and the number of retired people depending on them will increase. There are four Europeans of working age today for every one retired person. By 2060, there will be only two.

To be precise, Europe’s labour supply will remain stable up to around 2023, and decline thereafter, by about 19 million people, up to 2060.

As a result of these trends, Europe’s relatively small number of pre school and primary school children of today, will, later in their lives, have to support a proportionately much larger retired population, than will their competitors in India, China, and Indonesia.

Europe will be like a horse carrying extra weight in the “global competitiveness horse race” of the mid 21st Century.

In Europe, the OECD projects that, from 2014 to 2030, the increases in public expenditure on health, long term care, and pensions, will range from increases of 6.3 percentage points of GDP in Luxembourg, through 5.6 percentage points in Belgium,  and 4,8 points in Finland to 2.7 points in Ireland, down to  1.4 points of GDP in the UK, to a mere 0.8 points in Italy and 0.7  points in Poland. This is the difference made by pension and entitlement reforms in the latter countries.

If young people are to be able to have  the future earning capacity to bear these extra burdens ,it is essential that as small children today get every developmental educational advantage now, no matter what the present income status of their family.

That is not just a matter of social justice, although it certainly is that, it is a matter of pragmatic self interest for today’s, eventually to be retired, workforce and electorate.

But what sort of educational investment will make a difference?

Increasing the teacher /pupil ratio may help, but the evidence on that in ambiguous. Some countries with high teacher ratios do less well than do others with proportionately fewer teachers.

In fact, it  may be before children go to school at all that the  biggest improvements in intellectual ability can be achieved.

............SO THEY NEED EXTRA SUPPORT FROM THE EARLIEST AGE

I recently read a report prepared for Vietnam by the World Bank on how that country could improve its educational performance.

The report said bluntly

“Much of the inequality in learning outcomes, between different types of young Vietnamese observed in primary education and beyond, is already established before the age of formal schooling”

This may be caused by physical poverty, including bad or insufficient nutrition, which will stunt a baby’s mental development. Similar poor nutrition will be found in a minority of homes in rich countries too.

But things, like that,  that can be explained by lack of money, are not the only factors affecting a child’s mental development.

The World Bank Report goes on

“The brain development of young children’s highly sensitive to stimulation and interaction. The more parents and care givers interact with a young child, for example through talking, singing or reading, the better are the conditions for brain development”

The report suggests that, in Vietnam, babies from better off families have more of this sort of stimulative inter action with parents and care givers, than do babies in poorer families.

But the general  point about what makes a difference applies at all income levels, and if very small children , as they develop, only see their parents for an hour or so each day, and spend the rest of the time away from them, they may lose out on mental development, no matter how well off they may be materially.

If these World Bank views about intellectual development are true, they deserve an urgent response from parents, crèches, and government at all levels here in Europe.

If we are going to depend on a smaller number of children to support our welfare systems over the next forty years, we must do everything we can now, to enhance their earning capacity, especially by ensuring that they have a happy and stimulating childhood, from the earliest age.

That may be the most important long term economic stimulus of all!

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Speech by John Bruton, President of IFSC Ireland, and former Taoiseach, at the dinner  of the Institute of Chartered Accountants in Ireland in  the Convention Centre, Dublin at  8pm on Thursday 29th January
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