What will drive global growth?

Source: The post is based on the article “What will drive global growth?” published in Business Standard on 7^th February 2023.

Syllabus: GS 3 – Growth and Development

Relevance: factors responsible for growth in A-10 economies

News: The demographic shift in 10 major Asian economies (the A-10: China, India, Indonesia, Japan, the Philippines, Vietnam, Thailand, Korea, Malaysia, and Taiwan) is faster than the economic transition.

The article discusses the factors that can have impact on global growth.

How has been the contribution of A-10 economies to global GDP?

The contribution of A-10 economies to global GDP growth has risen steadily. It has reached 70 percent between 2014 and 2019, from 40 percent in the previous five years.

The main driver of this growth has been growth rise in China along with the steady growth in India and ASEAN economies.

There are factors that affects the global growth of GDP in the A-10 economies.

What are the factors that affect the growth?

Total Factor Productivity (TFP): TFP is a measure of efficiency which means the efficient utilization of the human and capital inputs to generate output.  A substantial part of the growth deceleration in A-10 GDP between 2015 and 2019 has been due to weaker TFP growth.

It was strong in India and Thailand over this period, but slowed for other economies and turned negative for China. Hence, the contribution of TFP to overall GDP growth can be large over time. 

Labour Input: Labour size has not been a large driver of growth for the last 15 years. Labour growth slowed to 0.4 percent a year in the 2005–14 period, and 0.3 percent between 2014 and 2019, with limited contribution to overall growth.

Therefore, even if population ageing slows down, the number of available workers would have a limited incremental impact on growth.

Capital Inputs: The capital formation has been the largest contributor to GDP growth in the A-10 in the last two decades. There has been considerable jump in capital use in several countries, including India, Indonesia, and the Philippines.

Capital inputs are mostly affected by regulations. However, demographics also play an important role in the demand for investments, especially for real-estate and infrastructure.

China’s high capital growth has been due to its focus on infrastructure spending and the surge in real estate investment.

Real estate contributes 15 per cent to China’s GDP, versus around 5 per cent for the developed Asian markets with ageing populations.

Therefore, slowing capital formation in China could be a significant growth headwind for the world.

Thus, the impact of an ageing A-10 on the world is less due to labour supply, and more due to slow growth in capital deployment in demographically challenged North Asia.

Slowing total factor productivity growth in some major A-10 economies is another headwind.

What can be the way ahead for India?

India needs to learn a lesson from these observations that the GDP growth can only occur with faster growth in capital formation because labour input is hard to change and TFP changes slowly.

The real-estate cycle in India is turning positive. However, India’s growth in coming years will not be large enough to affect global growth.

Hence, policies that facilitate inbound foreign investment can help India in its growth.