Article Summary | Bloomberg Businessweek

Drivers & Disrupters

Bloomberg Business Week – 2019.11.04

T. Orlik, S. Johnson, & A. Tanzi

The major disruptive forces affecting the global economy right now include protectionism, automation, digital economy, populism, and climate change. Overall, low- and middle-income countries will be more at risk and have more to lose than higher-income countries. The traditional economic drivers of economic development (investment, labor force, and productivity) can be upended by how countries deal with these new disruptors. 

The biggest factor in protectionism is the risk a country faces from trade wars. This can be evaluated by the share of its GDP exposed to trade wars and an IMF/Stanford measure of trade uncertainty. Also part of this risk is a country’s exposure to future protectionist risk: the importance of trade to the economy, trade balance with the U.S., current tariff levels, and the degree of participation in global supply chains.

Automation increases productivity but diminishes job security. In advanced countries, this can lead to even more polarized incomes. Low-to-middle income countries, low wage jobs can be easily automated, which will undermine the economic advantage of cheaper labor. The best way to country this risk is to invest in workforce training for skills and flexibility, income support, and increasing the number of people with university education.

The digital economy can provide opportunities for entrepreneurs and consumers outside traditional economic structures. It has the potential to help low- and middle-income countries jump past now out-of-date industries and technologies, but failure to succeed at it can lead to further polarization of income between them and more affluent countries. Four main risk factors here are: quality of internet infrastructure and engagement of consumers, businesses, and governments – none of which rates very strong in low- to middle-income countries.

Populism is leadership that claims to support the ‘common people’ against the ‘corrupt elites’. It’s focus is on simplistic solutions in lieu of complex policies and national unity over  international engagement. What results is protectionism, antimmigration policies, unfunded tax giveaways, threats to central bank independence, and ‘head-spinning policy uncertainty.’ A rising in populism is attributed to high income inequality and low social mobility, and high unemployment; lesser factors include rising immigration, rising crime rates, and weakened political institutions.

Climate change increasing has a negative impact on housing, infrastructure, and supply chains. Uncertainty about this risk gives business pause regarding new investments. Factors that will increase vulnerability include high temperatures, reliance on agriculture, and limited resources for adapting. 

Traditional drivers of economic growth include “four pillars”:

  1. Increases in labor force as a basis for growth
  2. Expansion in efficiently allocated capital stock, which raises labor productivity
  3. Policies focused on growth: education, macroeconomic stability, openness to trade, financial market development, innovation, and business climate
  4. Distance from the dividing line between low-and-middle-income countries and high-income countries (closer is better!)

Policies that are anticipating the disruptors will help countries close the gap:

  • Encouraging investment and innovation
  • Training/re-training for labor displaced by automation
  • Open opportunities in the digital economy
  • International agreements on trade (including services) and climate change

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