The Coming Decline: A World Without Economic Growth

By Michael Weidokal

For decades, most of the world's leading economies have been growing at an ever-slower pace. Worse, many of the economies that have so far managed to avoid such a slowdown are also facing the prospect of a decline in their economic growth. How did the global economy reach this point? Why has economic growth trended downwards in the final decades

• Language: English
• Publisher: ISA (International Strategic Analysis)
• Release date: May 13, 2024
• ISBN: 9798990452527

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The Coming Decline: A World Without Economic Growth

Copyright © 2024 by Michael Weidokal

All rights reserved. No part of this publication may be reproduced, distributed or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

ISBN 979-8-9904525-2-7 (ebook)

https://www.isa-world.com/

Cover and interior design: Adina Cucicov

To Kate and Jack

Table of Contents

Chapter One. A World That Expects Growth

Chapter Two. Growth Should Not Be Taken for Granted

Chapter Three. Do We Need Growth?

Chapter Four. A Century of Growth

Chapter Five. The World Since 1990

Chapter Six. The Recent Past

Chapter Seven. Demographics and Economic Destiny

Chapter Eight. The World’s Demographic Decline

Chapter Nine. The Impact of Declining Populations

Chapter Ten. The Impact of Trade and Investment Growth

Chapter Eleven. Trade and Investment at Risk

Chapter Twelve. The Decline of Trade and Investment

Chapter Thirteen. The Need for Productivity Growth

Chapter Fourteen. Can Productivity Be Revived?

Chapter Fifteen. Implications for the Future

Chapter Sixteen. Can Long-Term Economic Growth Be Revived?

Chapter One

A World That Expects Growth

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The world appears to have turned against growth. For the longest time, the level of growth achieved by a national, state or local economy was the ultimate measure of that economy’s success or failure, and of its health or sickness. However, growth is no longer in favor for many followers of economics as well for many of those who observe and measure the economy, either as a profession or a hobby. For those that would like to see the focus on growth lessened, growth simply ignores too many other issues. For example, in recent years there have been attempts to shift the focus of measuring economic success away from the generation of growth towards more abstract goals such as the creation of happiness or the improvement of a society’s quality of life.

It is unlikely that it is a mere coincidence that these attempts to recalibrate the measurement of economic success away from a focus on growth has come at a time when economic growth has become much less certain.

In fact, it is certainly no coincidence that many of those who are leading the efforts to focus on more abstract measurements of economic success are coming from countries or societies that have found themselves unable to generate much economic growth in recent years. Every few months a new study seems to appear touting a new formula to measure economic success, which titles ranging from The World’s Happiest Countries to The World’s Most Sustainable Economies, with each of these claiming that the era of growth is over, having given way to the era of happiness or the era of sustainability. It should be no surprise that the authors of these studies are often coming from countries or societies that have failed to generate significant economic growth in recent years but have not given up their ambition to explain to the world why their ways of doing things are superior. In fact, these studies often receive a great deal of media coverage, with reporters fawning over the countries that are declared to be the happiest, or those that are living the most sustainable lifestyles, often without questioning how these rankings were compiled, or the agendas of those who compiled them.

While measurements such as happiness, inclusiveness, sustainability and many others all have their merits, the measurement of economic growth remains the essential measure of an economy’s health. No other measure better determines the vitality of an economy or the progress that an economy is making over time.

Think of it like a football (or soccer, depending upon your location) match, where happiness is the fluidity in which a team plays, sustainability is the health of the players and inclusiveness is the teamwork. Well, in this analogy, growth is the actual score of the match. The other factors are nice, but it is the score that decides whether or not the team wins or loses and determines where the team is located on the table (or in the standings, again choose your regional preference). If your team loses too many times, your team will be relegated to a lower division. If your economy fails to generate enough growth, your country could fall into a lower group of economies. In this analogy, China has surged to the top flight of countries thanks to decades of soaring economic growth rates, whereas Greece has been relegated to the middle income group of economies due to its lack of economic growth in the 21st century, Simply put, the ability of a country, a state or a city to generate sustained high levels of economic growth conveys power to that country, state or city, whereas an inability to generate economic growth over the longer-term drains a country, state or city of its power and competitiveness.

Growth is also the measure that takes into account more other factors that any other measurements that has been devised so far. While an economic growth figure may seem extremely straightforward at first, in fact, it encompasses a wide range of factors. For example, an economic growth result (we’ll focus on the standard GDP growth rate from now on) includes many factors. The growth of the market is a key factor, including consumer spending, business spending and government spending. Likewise, the production of goods and the provision of services are also major components of growth.

Whereas consumption and production are tangible components of economic output and its growth, there are many other variables that go into determining economic growth over the longer-term. These include technological advancements, which plays a crucial role in positioning an economy to grow over longer periods of time. Wealth levels are another important factor, as strong domestic markets shield an economy from many forms of external risk. Economic policy is obviously another important factor, although strong economies can sometimes overcome unsound policy, at least for a period of time. Having access to consumers, especially those with higher levels of purchasing power, is another crucial factor in an economy’s ability to generate growth. A well-developed financial system is yet another factor that plays a role in determining an economy’s level of growth, while factors such as commercial development and the ability to attract investment also impact how well, or how poorly, an economy does when it comes to its ability to generate growth.

While growth remains the single leading measure of an economy’s health and vitality, many economists believe that the use of GDP growth has seen its time come as the sole leading measure of an economy’s success and direction. This has led to numerous other measurements being developed as a means of determining the health and vitality of an economy. For example, something called the Genuine Progress Indicator was created a few years ago in order to account for factors such as environmental health and social well-being. This was just one of many such calculations that were created over the past few years to lessen the perceived dependence upon GDP growth as the sole measure of how well an economy was performing.

Many of these new measurements attempt to focus more on living standards and less on economic output. For example, the physical and mental health of a country’s population is quantified in many of these new measurements. Likewise, well-being, often in the form of social and health security, is another popular component of many of these new measurements. Often these alternative measurements are associated with longer-term growth trends, as changes in public health and happiness rarely manifest themselves over the shorter-term. Supporters of these sorts of new economic measurements like to claim that they are a more accurate representation of an economy’s impact on the population than standard GDP growth. However, it is also clear that, without long-term GDP growth, high levels of living standards and popular well-being are difficult to maintain.

For most of the world, measuring relative economic power and success is the easiest method for one country to compare its success against another. This is due, in large part, to the fact that there are so many statistics available that can be used to measure one economy’s success or relative power against another’s. GDP growth rates are very easy to compare, as are measurements of the size of the economy, its share of exports and many more. Just think back to the early months of the Covid-19 pandemic, when comparing international case numbers and fatality rates became an international obsession. In fact, countries compete with one another all the time, and, to a lesser degree, states and provinces compete with their fellow states and provinces, just as cities compete with other cities. Still, the data is much clearer when it comes to country-against-country competition. This does not just apply to economic competition. For example, countries, at least the largest of them, often compete over which has the greater military power. For others, sporting prowess is an important battlefield, with events such as the Olympics serving as a way for countries to attempt to assert their strength and vigor over their rivals. Even culture is not immune from international competition, with issues such as language, music and popular culture often resulting in competition between countries. While all of these other fields may not be directly related to economics, it is clear that, without long-term economic growth, a country’s position in areas such as military power, sporting success or cultural influence will weaken over time.

No matter what sort of calculation, formula or concoction is created to measure a country’s economic success, they all, so far, fall short of economic growth. First, many of these new calculations are simply too subjective, reflecting the biases of those that created these calculations. For example, countries with extensive social welfare systems have often attempted to create new measurements of economic success that emphasize the importance of wealth equality, extensive social services and other such facets of their economic systems. Likewise, some poorer countries have attempted to shift the focus to happiness, although it is hard to find a more subjective factor to measure. What we keep coming back to is the fact that, no matter what measurements we use to attempt to determine the success and power of a country, a state or a city, we keep coming back to economic growth. Without long-term and sustained economic growth, no country, state or city has been able to significantly enhance their position in the world, or the long-term well-being of their citizens.

The Modern World Has Known Nothing Else Than Growth

Since the Industrial Revolution, countries that have undergone industrialization and modernization have known little other than growth. In general, all of the world’s major economies have enjoyed long-term economic growth over most of their modern histories. Sure, there have been periods of decline, sometimes steep and sometimes lasting multiple years, but in general, the trendline for the output for the world’s largest economies has been almost steadily upwards. Once the process of industrialization had transformed an economy, that economy appeared to be immune from long-term decline, or at least that is what the last couple of centuries led us to believe.

Let’s go back in time and see how global economic output (measured as always in this book as GDP) has evolved. To do so, we will rely heavily upon the work of Angus Maddison, the famed British economist whose work on the measurement and analysis of historical economic output and growth has become the basis for much of our ability to compare and contrast long-term historical economic data, as well as for much of our economic data before the 20th century. Of course, the accuracy of such historical data, particular when we delve far back into human history, is subject to debate, but in our quest to quantify and compare long-term economic data, we need a basis for our calculations. Therefore, this combination of Maddison’s long-term historical data and our range of sources for more modern data will give us at least the opportunity to compare economies across eras.

Using this combination of sources, here is a chart showing the long-term evolution of global economic output:

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As this chart shows, the global economy has made incredible strides since the Industrial Revolution. Based on Maddison’s historical data, global economic output essentially did not increase at all over the 1000-year period from the year 1CE to the year 1000CE, with global GDP rising from $103 billion in the 1CE to $117 billion in 1000CE. It’s no wonder that the post-Roman period in Europe is known as the Dark Ages, for in the centuries after the Roman Empire’s peak of its economic power in the 2nd Century CE, economic output in most of Europe fell precipitously and for a very long time. Even during the near-eight centuries that stretched from the year 1000CE to the late 18th century, when the Industrial Revolution emerged in Britain, global economic growth was minimal at best. According to Maddison, and some of my own economic research, global economic output rose from $117 billion in 1000CE to approximately $550 million in the year 1780. That near 400% increase in economic output may sound impressive, but remember, it took 780 years to achieve. To put that in perspective, global economic output has risen by 500% during my lifetime (I was born in 1972). So it took the world economy 780 years to reach the level of economic output that existed at the time of the start of the Industrial Revolution, but it took just the relatively short lifetime (wishful thinking, perhaps) of this author for the global economy to do the same.

Despite this impressive record of remarkably steady growth over the past two-and-a-half centuries, it is the recessions, crashes, depressions and other calamities that often stick in one’s mind when considering the history of the world economy during this period. For example, we consider the 19th century the period of great economic expansion for the United States, one that would take that young country from the position of a minor player on the global stage to the world’s largest economy by the end of that century. This gives the impression that the US economy enjoyed almost uninterrupted rapid economic growth, perhaps along the lines of what China achieved over the past four decades. In fact, while the US economy did expand dramatically from the beginning to the end of the 19th century, this expansion was constantly interrupted by a series of severe recessions, panics and depressions that occurred at a frequency that is hard to comprehend for a 21st century mind. It is now estimated that the US economy fell into at least 24 recessions over the course of the 19th century, some of which would today be referred to as depressions as their impact on economic output in the US was sometimes nearly as great as that of the Great Depression.

The largest of these downturns in considered to have been the Panic of 1893, which led to a decline in industrial production of more than 15% between 1892 and 1894 and led to a major increase in political instability in the United States. As we know now, despite 24 recessions, panics and depressions, the United States economy expanded rapidly overall during the 19th century and entered the 20th century as the largest and wealthiest economy in the world, showing that despite this extreme volatility, the US economy managed to remain on track for long-term economic growth through the 19th century.

Overall, it is the crises that typically receive the bulk of the attention in the study of economic history, just as it is the wars and upheavals that attract the majority of the attention in general history studies. The mild recessions that led to minor declines in economic output and relatively quick recoveries, and make up the large majority of recessions, are not the ones that attract much attention. Instead, it is major crises that are studied from all angles, crises such as the Great Depression, the 2008-2009 Financial Crisis (sometimes referred to as the Great Recession) and the Covid-19 pandemic. Yet even these crises eventually gave way to renewed economic growth, even if some countries only returned to growth after a great deal of stress and unrest. The fact is that all of the world’s economies are many times larger today than they were at the start of the Great Depression, showing that, even amid the tremendous economic dislocations that such an event (and other subsequent events) caused, the overall trend remained one of growth for all economies around the world. This has led the world to believe that, no matter how bad a downturn is, the global economy will always find a way to return to growth.

Growth is Taken for Granted

For most of the world’s people, long-term economic growth is taken for granted. If you are a ten-year-old American (sorry Latin Americans, I’m referring to the US sort here), your country’s economy is now 30% larger than it was when you were born. If you are 40-year-old American, your country’s economy is now 200% larger than when you were born. Finally, if you are a 60-year-old American, the US economy is now 530% larger than in the year of your birth.

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The scale of this growth is even more dramatic if you are Chinese. For a ten-year-old Chinese person, the corresponding figure is 105%, whereas for a 40-year-old in China it is 35,000% and for a 60-year-old it is an astounding 100,000%.

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Looking at these figures, it is easy to see why the world assumes that the economy will always grow over the longer-term, for, in modern times, it always has. Such incredible advancements in wealth and development would not be achievable without long-term growth.

While the United States and China have both achieved relatively strong growth rates when compared to their peers, they are not alone. In fact, nearly all economies around the world have been able to generate relatively consistent growth in recent decades, even if their levels of growth may not be as fast as others, or if they have experienced more downturns than others. However, there are some economies that have struggled to generate much growth in recent decades. For a variety of reasons, some economies have found it difficult to generate consistent growth. Of course, we have seen this throughout history, as once powerful economies would find themselves stuck in an inescapable downwards spiral. Sometimes this decline would be dramatic and sudden, but other times, it would be slow and steady. For those that collapsed suddenly, the causes were often wars, natural disasters, plagues or other such dramatic events. For those that declined more gradually, many of the reasons were related to the internal weaknesses of those countries, weaknesses that could be the result of a declining population, a lack of investment in faster-growing sectors of the economy, a lack of competitiveness, or many other factors. Whatever the reason, there have also been losers in terms of economic development, even when most of the world has been winning.

Given the steady growth of most of the global economy, any economy that has struggled to generate significant growth for an extended period of time has been tagged as the Sick Man of their respective region, with many economies being forced to wear this label at any given time. The term comes from descriptions of the late Ottoman Empire, whose failure to modernize or generate the levels of economic growth that were to be found in other parts of Europe in the late 19th and early 20th centuries was to result in that country falling far behind its rivals in Europe, leading to various European powers circling the Ottoman state like vultures waiting for a sick animal to die. Today, a few countries are saddled with such an indignity. For example, Greece, since the financial crisis in 2008 and 2009, has found itself jettisoned from many lists of fully-developed economies, as its relative wealth to the rest of the West (of which it is questionably a part) has fallen dramatically during the past decade, even following a strong recovery in the wake of the Covid-19 pandemic.

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Likewise, Italy’s 20+ years of stagnation are often viewed from northern Europe as justification for certain prejudices towards Italy from that region. Argentina is another country, that, while once wealthy, has fallen on hard times and is viewed with much skepticism from its wealthier counterparts.

Such disdain is not only reserved for countries. On a grander scale, entire regions that struggle to keep up economically with the world’s more dynamic regions are often viewed with a certain disdain. The United States and Canada’s ability to grow rapidly in the 19th and 20th centuries stood in stark contrast the economic performance of their neighbors to the south, shaping the North American view of Latin America for the past two centuries. Likewise, many in East Asia today view the slow growth of many Western economies as proof that the 21st century will belong to Asia, and view many of these sluggish Western countries as has-beens that are afraid of the modern world and the technologies and processes that drive it.

This disdain for slower growing economies can also apply to state and local economies. For example, the Rust Belt in the United States (the birthplace of this author) is often looked down upon by those in the US that are fortunate enough to live in faster-growing regions of the country. Likewise, rapidly-growing London is viewed much differently than stagnant areas of northern England as one region continues to grow while the other struggles to meet the challenges of the 21st century. Such disdain differs from the more traditional intra-country differences that arise from wealth disparities such as those between northern and southern Italy, or coastal and interior China. While wealth disparities are often disparaged for being a leading cause of migration between regions or countries, in fact, it should be growth disparities that drive such migration, as this is a relatively efficient allocation of labor.

Struggling economies are often treated as pariahs because of the fact that, in the modern world, steady growth is expected, or even taken for granted. However, as we will see over the course of this book, economic growth in the developed world is slowing. Worse, growth in the developed world has been trending downwards for more than two generations now, and the factors are in place for growth in these countries to continue to slow in the coming decades. Nevertheless, while growth is slowing, recessions and other major crises were often viewed as threats from the past. Now, with two major crises in a span of a little more than a decade, the world is waking up to the fact that severe recessions and disruptions remain a threat to the global economy. Furthermore, this threat from recessions and disruptions has added to the downwards pressure facing developed economies, making it even harder for most developed economies to generate anywhere near the level of growth that they were achieving in previous decades.

Expectations of economic growth in developing countries have also risen significantly in recent decades. This is due in no small part to the remarkable success of East Asian economies during this period. As countries such as South Korea and China have gone from being ranking among the poorest economies in the world to some of the world’s most powerful economies, other developing countries in all parts of the world have hoped to be able to emulate this tremendous success and to elevate their populations’ living standards, just as East Asia’s most dynamic economies have done. As we will see, the rest of the world might be too late, as the ability of poorer countries to lift themselves out of poverty is about to be challenged by many of the same factors that are threatening to lead to much lower levels of global economic growth in developed economies in the years ahead.

Chapter Two

Growth Should Not Be Taken for Granted

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Contrary to popular belief, the history of humankind has not been one of constant economic growth and improvements in living standards. Sure, if one takes a very long-term view of human history, it is clear that the overall trend from our emergence in East Africa to our pre-eminence in the modern world is one of remarkable achievements in terms of economic expansion, improved living standards and unimaginable technological advancement. Of course, there have been many periods in which this economic growth has reversed, living standards have fallen and levels of technology have receded. These periods are perceived with such dread that they are typically referred to as Dark Ages, the most famous of which is the Dark Ages period in Europe that stretched from the latter days of the Roman Empire to the early period of the Renaissance. Nevertheless, while these Dark Ages are filled with tales of decline and danger, they have all given way to new periods of advancement so that almost all areas of the world are now at their peak of economic output, living standards and technological development. This has reinforced the notion that, no matter how bad things get, the future holds the promise of renewed economic vigor, better living standards and further technological advancements. This notion is furthered by the fact that, since the Industrial Revolution, humanity has generally moved forward in all of these areas.

While the past centuries of growth have given us the impression that the global economy has been moving forwards rather consistently, the fact is that much of our economic history has been filled with volatility. In fact, there have been many periods in which economic output trended downwards for centuries at a time. For example, if one looks at the economic history of Europe from the 3rd century until the 13th century, a period of a 1,000 years, one would see remarkable declines in economic output over the first part of that 1,000-year period, followed by centuries of stagnation, declining living standards and a general lack of technological advancement. It was only when early-Middle-Ages European states chose to relearn the lessons of that region’s ancient past that they were able to turn the region’s economy in the direction of growth once again. Similar developments have happened over China’s long history, most notably during its steady decline between the 15th and early 20th centuries, when China went from having the world’s largest economy by a very large margin to one that accounted for less than 10% of total global economic output in 1950. In fact, our studies of pre-Industrial-Revolution economies show us that long-term economic growth was anything but assured and that long-term decline was both possible, but also probable.

Even the first 150-to-175 years after the Industrial Revolution were filled with massive economic upheavals in which double-digit declines in economic output among even the world’s most advanced economies were an all-too-frequent occurrence. For example, there have been an estimated 50 recessions in the United States since it gained its independence from the United Kingdom, beginning with the Panic of 1785 that followed the end of the US’ War for Independence to the Covid-19 pandemic that was raging as this book was being written. Of these, 38 of them took place during the 160 years between 1785 and 1945, or basically a recession every 4.2 years. Worse, many of these recessions were actually devastating economic events that reduced economic output in the United States along the lines of the contraction recorded during the Great Depression. Since the end of World War Two, there have been 12 recessions in the US, or one every 6.25 years. Moreover, until the Covid-19 pandemic shut down the US economy in early 2020, all of these recessions were relatively mild compared to the severe crises that impacted the US economy all too frequently before 1945.

On a global basis, the picture is the same. Yes, individual countries or regions have suffered great upheavals over the past 75 years, but the overall economic growth trend for the world has been positive. Even when there have been worldwide economic crises, such as the Oil Shocks of the 1970s, the Great Recession of 2008-2009 or the Covid-19 pandemic of 2020, the global economy has quickly bounced back, driven upwards by its more robust economies and its more dynamic industries. In fact, between the end of the Second World War and the Covid-19 pandemic year of 2020, there had been only one year in that 75-year period in which global economic output had actually declined over the course of a year. That year was 2009, when the Global Financial Crisis resulted in a decline in global economic output if just 0.1%. In all other years between the late-1940s and 2020, global economic output increased. This itself is a remarkable achievement that was made possible by a wide variety of factors, including demographic growth, a global trading system that was dominated by a single benevolent power and increases in productivity (at least in the early decades of this period).

As we continue to recover from the impact of the Covid-19 crisis, which itself hit the world economy at a time when growth was slowing, we have to consider whether or not we are in the early stages of another period of long-term economic decline. Sure, this is hard to imagine given the fact that, for 74 of the 75 years prior to the Covid-19 pandemic, global economic output had risen. However, there are many worrying signs that suggest that we are indeed facing the prospects of long-term economic decline such as we have not seen in nearly a century, if not longer. Even more worrying is the fact that many of these signs are coming from what have been some of the world’s most-successful economies, those that were the drivers of much of the long-term growth that has characterized the post-war period of the global economy.

Looking back at history, there are many examples of economies that enjoyed very long stretches of growth, only to succumb to even greater long-term declines. A perfect example of this is the Late Roman Empire. In the 1st and 2nd centuries, Rome was the epitome of economic power and success in the ancient world. Not only was Rome the ancient world’s most powerful state and its most advanced economy, but it set the standards for all future levels of economic development for the next 1500 years, particularly in Europe and the Mediterranean.

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At its peak, Rome was the world’s first inter-connected modern economy. This meant that Rome was an economy that was based on trade, investment, productivity improvements and specialization. As Rome controlled the trading routes both within the empire as well as with many of its neighboring states, it was able to guarantee safe passage of goods, labor and resources, bringing together a vast area with diverse industries and resources into a single economy. Moreover, this control of the trading routes within and outside of the empire enabled for specialization to take hold and for productivity to grow at one of its fastest rates in history. For example, farmers in North Africa could sell their wheat and other agricultural products throughout the empire, giving them a vastly larger market than they would have had outside of the empire. Likewise, metalworkers in Spain could sell their products as far afield as the eastern Mediterranean or Britain thanks to the Roman road network and the speed and security that it provided to traders. This enabled Rome to become the largest and wealthiest economy in the ancient world. Furthermore, this wealth spread to a larger share of the Roman population than it had in other contemporary states, where wealth was extremely concentrated in the hands of a very small ruling class.

Unfortunately for Rome’s economy, the empire was hit by a series of crises in the late 2nd and early 3rd centuries, crises that would disrupt and dislocate Rome’s economy. These crises included plagues that led to a sharp decline in the empire’s population, internal conflicts that broke apart Rome’s vast single market, and major declines in public revenues which resulted in the state no longer being able to pay for the public services that Rome had become so well-known for during its peak period. Over the next 250 years or so, the Roman empire in western Europe declined, despite the best efforts of Diocletian, Constantine and others, until it eventually fell in 476 CE. Remarkably, western Europe would not return to the levels of economic advancement and the standards of living that were enjoyed by Romans during the peak of their empire until the 18th and 19th centuries.

Another example of an economy that enjoyed long-term growth and prosperity only to fall into just as long of a period of decline and decay as post-Roman Europe is the Chinese economy between the 17th and the 20th centuries. By the 17th century, China had re-emerged as the world’s leading economic center as the Qing Dynasty recentralized control of the Chinese economy after the dislocations caused during the late Ming period.

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However, while China’s economy was vast in scale and remained technologically advanced, it was soon to fall behind. This was due in no small part to efforts by China to isolate itself at times from the rest of the world and to ignore technological advancements that were being developed outside of its borders. When the Industrial Revolution spread across Europe and North America in the late 18th and early 19th centuries, China was left in the dust, so to speak, as those regions’ rates of productivity growth soared past those of China by a dramatic margin. Furthermore, these Western powers amassed vast empires that gave them access to resources and captive markets, while their own demographic growth soared.

By the mid-19th century, China’s decline was accelerating. While its vast market was attractive to foreign traders, it also brought Western powers into the