Fabrizio Carmignani on the Global Economy

Fabrizio Carmignani on growth, sustainability and what policymakers could do to spark a new Industrial Revolution.

Fabrizio Carmignani on the Global Economy
Credit: Fabrizio Carmignani

“Inclusive” economic growth has become a buzzword in the wake of Thomas Piketty’s research on inequality. With the gap between rich and poor widening and the world economy still struggling to recover from the global financial crisis, is sustainable growth possible?

The Diplomat’s Anthony Fensom spoke to Griffith University’s Professor Fabrizio Carmignani, an expert in development economics, on whether there is a trade-off between sustainability and growth, and what policymakers could do to spark a new Industrial Revolution for the world economy.

At the Group of Twenty’s Brisbane Summit, the final communiqué emphasized a numerical target of raising the G20’s GDP “by at least an additional 2 percent by 2018” – what’s the problem with this?

I think it’s good to have a numerical target because it makes the objective more transparent and easy to understand. We know what the target is, we can look at what countries have achieved and compare it with the target. But I don’t think it’s enough, first of all because a 2 percent GDP expansion might not be ambitious enough.

Secondly and more importantly though, the number is just about quantity and not quality. We should always remember that the quantity of growth is not sufficient to achieve inclusiveness, and inclusiveness is what we need to promote development and improve living standards.

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How can inclusiveness be achieved?

There’s not a recipe that applies to all countries at all times; that’s what we’ve learned in the past 50 years. But there are a few things that apply in general. In my opinion, inclusiveness requires a strong role of the government in providing public goods such as education and health, as well as a social safety net.

Unfortunately there’s often a debate where government is seen as an obstacle to growth. I don’t accept this and it’s a view which is not supported by any empirical evidence or economic theory. You can have very high growth and this growth can be inclusive, so there’s no trade-off between the two. And the way to avoid the trade-off is to have an active government that provides public goods and public services that are accessible to everyone.

In Asia, China has achieved rapid economic growth over the past two decades, however inequality has worsened and growth is now slowing. What might Beijing do to address this, and the rest of developing Asia? 

In the case of China and other eastern Asian countries, the view has been that growth is essentially a matter of investment and creating an environment conducive to domestic and international investors. And this is certainly true – you can’t start the process of growth without a huge amount of investment and capital accumulation at the beginning.

But as you evolve from a developing into an emerging and then developed economy, investment and physical capital accumulation are no longer enough to sustain growth. As we can see today growth is slowing down, and even in the past it has not been very inclusive; that is, significant inequalities have emerged in the last two decades in China.

So it is time for the Chinese government to rethink its development strategy. China has to realise that the government has an important role in promoting inclusiveness. So far it seems to me that the Chinese government has exclusively promoted growth.

There’s been considerable debate over French economist Thomas Piketty’s research and the widening gap between the haves and the have-nots. Is this a problem for the world economy and what might be done to address it?

Piketty is looking at a trend where we might eventually evolve into what he calls a patrimonial society, where you have a relatively small group of rentiers, people who enjoy rents from their own wealth, and a large group of people who basically are at a subsistence level. If that happens, the risk would be that we go back to a pre-Industrial Revolution situation, where there was no incentive to generate technological innovation and therefore growth would stop.

If we know anything from history, technological innovation and hence growth basically arise from the middle class, and in Piketty’s patrimonial society there is no middle class, there’s no bourgeoisie to use the French term. So there’s no entrepreneurial incentive to generate the type of technological innovation which is the fundamental driver of growth.

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How close we are to a patrimonial society is hard to say – we are not yet in a situation where the middle class has disappeared. But certainly one of the long-term implications of the global financial crisis was the polarisation of income distribution. It is true that in the past few years, the middle class has become thinner and thinner. Some have moved up to the group of very rich, but many have gone down to the group of the poor. We have observed this more markedly in Europe.

If not changed, the dynamics of the last few years will in the medium to long-term drive us to a society where the middle class is too thin to create incentives for further technological innovation.

You have talked about a “green revolution” potentially sparking the next stage of global growth. How might this come about?

The reason why I focus on green technologies is because economic growth is a process of technological innovation and to me, green technologies are the best hope that we have to generate a new Industrial Revolution. We need to do that with a co-operative effort; we can’t expect one country or one small group of researchers to push forward.

We need government support for research and development (R&D) in green technologies; we need a government with the financial and political capital to provide significant investment in basic research, not just commercial research in green technologies. We need an international legal framework that allows for the diffusion and adoption of new discoveries.

This seems easy to say but it’s actually quite complicated. If I’m a researcher and I know that once I invest in research and I achieve a new idea, and this idea can be immediately copied and implemented by anyone else in the world, then my incentive to invest in R&D disappears. But at the same time, if the copyright on my new idea is too tight, then there will be not enough diffusion of my idea for it to become a new Industrial Revolution. So we need to find a compromise between these two tensions.

That’s why I think it’s important to have a cooperative effort at global level where we define a legal framework that while encouraging investment in R&D, it also allows for the outcome of this R&D to spill over, to be spread to all the countries.

Of course, that doesn’t mean tomorrow we will get rid of all existing energy sources – it’s a long-term process, but it’s a process that will inevitably involve some creative destruction. As green technologies become more popular and get adopted, new sectors will emerge and old sectors and old industries will become obsolete.

The government should avoid stopping this process – every Industrial Revolution has implied the destruction of certain traditional old sectors and the emergence of new ones, and if the government stops that, then we stop technological progress and therefore we stop economic growth.

A major problem in Europe recently and certainly in Japan is deflation. How might this be combatted?

The problem is not deflation per se but why we have deflation – deflation is a symptom of a much deeper disease and we should worry about the disease rather than the symptom.

Historically, deflation was always associated with economic recession or stagnation. When your economy is expanding you also experience growing inflation; when you have a prolonged contraction, as we have had at global level for a number of years, then the implication is deflation because the contraction reduces demand and prices tend to go down. So the problem is more fundamental than deflation.

However what that means is we could try to use monetary policy in a more expansionary way, as the U.S. has done through quantitative easing (QE), in order to stimulate their short-term recovery.

There are two qualifications – the first is that it doesn’t necessarily work. The U.S. used monetary policy well through QE to stimulate their economy, but Europe might be too late. The second thing is that monetary policy is effective in the short term, but we can’t hope to stimulate long-term growth only through very expansionary monetary policy. As Japan’s experience in the 1990s shows, long-term growth is not achieved just by printing money.

In that regard, how do you see the prospects for Abenomics?

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Abenomics would have been a good short-term response – expansionary fiscal and monetary policy in a phase of recession is good, and that’s what the European Central Bank and Europe should have done more. However, when we take these policies and we put them as a long-term growth strategy, that’s a mistake.

Abenomics in my opinion is flawed as it makes a strategy for the short term a strategy for the long term. That’s the same mistake that was made in the 90s and I’m afraid Japan still has a lesson to learn. If the objective is to stimulate the long-term trend of growth, then history and empirical evidence indicates that it’s not through continued expenditure and continued expansionary monetary policy.

Looking at Australia, how do you see the nation’s economic progress post the mining boom? Is a recession likely and what can be done to broaden growth?

Australia was able to avoid recession during the global financial crisis and that shows how resilient the Australian economy is. Even if we were to experience a couple of quarters of contraction in the near future, that wouldn’t dramatically change our standard of living.

What we have to look at is how we go from here over the next 10 to 20 years. What we have to worry about is growth for the next generation, and the generation after the next one. Certainly the Australian economy has to change. Mining will always be an important part of the Australian economy, at least for the foreseeable future, but it can’t be the only driver of growth.

It’s very important that we start the process of diversification that all economies have gone through at some stage, in order to maintain and even improve our current living standard. I don’t see mining as an obstacle to the process of diversification, but what we need is an inspired government with a long-term plan to encourage the Australian economy towards diversification. We need to make the best possible use of the revenues that we have now in order to promote new activities and new sectors.

Now there are ways of doing this. We shouldn’t make the mistake that was made by many countries in the 70s and 80s, when basically the government planned which sectors should be developed. This is a process that should be driven by the market, but the government has an important role in encouraging this process. Going back to where we started, Australia needs to realize that the only way to promote better living standards for the next generation and the generation after the next, is to achieve not just growth but inclusive growth, which occasionally our current government seems to forget.