target="_blank" rel="nofollow" href="#ulink_a049384f-e76e-54a1-9dfa-1bda1d7904e6">Figure 2.2 Share of investment in equipment and other physical assets (Gross Capital Formation) in GDP
Source: data from World Bank World Development Indicators
At the world level, considering the average of all economies irrespective of size, the share of new investment in GDP fell between 1970 and 1990, and stabilized thereafter. It is worth noting that much investment takes the form of replacing worn-out ‘depreciated’ productive capacity, buildings and infrastructure. In general, it is only when investment exceeds 15–16 per cent of GDP that it can be said that investment provides for additional productive capacity. As can be seen from Figure 2.2, the investment rate in the US and the Euro area after the 2008 Financial Crisis was perilously close to this depreciation rate.
As in the case of declining growth trends (Figure 2.1), China has been a very significant outlier to this pattern of global slowdown in investment. Not only has the share of investment in its GDP been on a rising trend since 1970, but the size of this share is significantly higher than that for the major global economies and for the world economy as a whole. Compare China and the USA, for example. The investment-share in the US fell from its high point of 24 per cent between 1978 and 1980 to less than 20 per cent after 2010. In China, this share was more than 40 per cent throughout the 1990s and after the millennium, and reached 46 per cent in 2013. That means that China was devoting almost half of its total annual production to new capital investment.
And what about the productivity of investment?
The quantity of investment does not necessarily translate into increased output: it all depends on the quality – that is the productivity – of investment. There is a widespread belief that productivity was enhanced by the diffusion of computing across a range of industries after the invention of the microprocessor in 1971. Surely, it was argued, the availability of equipment capable of speeding up data-processing, providing greater accuracy in production and communicating with similar electronically controlled equipment would facilitate the substitution of machines for human endeavour – in other words, speed up labour productivity growth? And surely, electronically controlled machinery would be more productive than mechanically controlled equipment? Surprisingly, the evidence does not support this assertion. This led the Nobel Prize-winner Robert Solow to remark in 1987 that ‘You can see the computer age everywhere but in the productivity statistics.’
As can be seen from Figure 2.3, with the exception of a productivity-growth decade in the US after 1997, resulting from the initial deployment of ICTs, all of the major economies witnessed a declining trend in their growth of productivity (in this case, labour productivity) after World War 2. This fall in the rate of productivity growth was accentuated after the 2008 Financial Crisis. The productivity growth rates in the most recent decade (1 per cent, 0.9 per cent, 0.9 per cent, 0.6 per cent, 0.4 per cent and – 0.4 per cent for the US, Japan, Germany, France, UK and Italy, respectively) were significantly below those for the whole period between 1951 and 2017 (1.9 per cent, 4.1 per cent, 3.4 per cent, 3.1 per cent, 2.3 per cent and 2.6 per cent, respectively).
Figure 2.3 Annual growth of labour productivity, 1951–2019
Source: data from The Conference Board (www.conference-board.org)
2.3 Neo-liberalism and the Decline in Growth, Investment and Productivity
Two factors explain the decline in the rates of productivity growth, economic growth and investment. As I have already observed, the first is that these outcomes result from the atrophy of the Mass Production paradigm which entered its maturity phase in the mid-1970s, and I will discuss this critical development in detail in Chapter 5. The second determinant of the slowdown, which I will discuss in the remainder of this chapter, was the neo-liberal policy response to the underlying slowdown in the growth trajectory of Mass Production. Neo-liberalism not only exacerbated the underlying problems of Mass Production, but also increasingly fuelled systemic inequality, the precarity of livelihoods and the fragility of economic systems. All of these, as we will see in the following chapter, contributed to the erosion of liberal democracies and the rise of populist politics, further undermining the sustainability of future economic growth.
Free trade and the retreat from Industrial Policy – increasing imbalances between countries
The post-war Golden Age growth boom between 1950 and the early 1970s was accompanied by a steady reduction in impediments to trade across national borders. Tariffs on imports and ‘non-tariff barriers’ (affecting the quantity of traded goods rather than their price) were steadily reduced in most of the high-income economies. After the mid-1970s and until the second decade of the twenty-first century, the pace of trade liberalization intensified. It also spread throughout the global economy to low- and middle-income economies, as well as to the formerly heavily protected communist countries in Eastern Europe. Even China, which continued to maintain many formal and informal restrictions on imports, opened many of its markets to imports.
The neo-liberal commitment to free trade was premised on the belief that market-based trade relations would promote growth much more effectively than controls introduced by governments on trade with other countries. This commitment to free trade and ‘open borders’ was complemented by the withdrawal of government support for ‘Industrial Policy’ (a term loosely used to describe policies directed at all activities in the productive sector). Government support for industry – ‘picking winners’ (promoting particular sectors and ‘national champion’ firms) – and financial support for innovation and other determinants of long-term growth were seen as raising the tax burden and reducing the efficiency of resource allocation, and thus being harmful to economic growth.
The consequence of this dual neo-liberal policy agenda was a hollowing-out of manufacturing in those high-income countries pursuing the neo-liberal agenda most vigorously, particularly the US and the UK. It resulted in the growth of high levels of unemployment in the rust-belt regions which had formerly been centres of industrial activity, for example in cities such as Michigan in the US Midwest, and Birmingham and Sunderland in the Midlands and the North-East in the UK. (I will discuss the social and political consequences of this deindustrialization in the next chapter.) It also led to a shift in the geography of investment by many of the major global corporations. There was a massive outflow of investment from the home economy and other high-income economies to economies in the developing world, particularly China. Much of this investment was directed to shifting supply chains to low-wage developing economies. The share of global direct foreign investment directed to developing economies rose from 17 per cent in 1990 to 44 per cent in 2019.1
These developments resulted in the growth of trade imbalances between economies. That is, they consistently imported more from other countries than they exported. The level of this deficit was particularly high for the world’s largest economy, the US, and for the UK (Figure 2.4). By contrast, countries such as China, Korea and Germany, which had pursued dirigiste policies to support industry, had growing trade surpluses, accompanied by relatively high rates of economic growth.
