Dubai: Income inequality is one of the major obstacles to global growth, leading economists told the Arab Strategy Forum on Monday.
Dr Nouriel Roubini, of New York University, and Dr Larry Summers, former US Treasury Secretary under Bill Clinton, warned that savings were tying up money that could otherwise be used to drive growth.
“If inequality goes up, we are distributing income from labour to capital. We are transferring from people with a propensity to spend to people with a propensity to save,” said Dr Roubini as he and Dr Summers spoke on the state of the world economy in 2016.
Dr Summers added that demand was becoming a bigger issue for growth than supply.
“The more you think you’re going to have a lot of supply, the more the limitation on demand becomes a problem and a constraint. That’s why I’ve put emphasis on demand-side stagnation.
“It’s no time to yabber about normalising. Normal is gone. The interest rates that once worked are not the interest rates that will maintain reasonable growth. We need steps that are raising the level of demand. That means creating more investment. If we invested more in infrastructure we’d grow more in the future.”
Dr Roubini agreed.
“There is a significant need for infrastructure around the world, with the exception of China. In the Middle East there is a huge demand for infrastructure, even in the West.”
In an interview after the panel discussion Dr Summers said, “I think [inequality] is a growing problem, and it is a matter that has to be addressed country by country. There are a range of [solutions] from more progressive taxation to closing the tax loopholes to empowerment of workers on a variety of levels.
“I think you’re starting to see the United States more concerned about inequality. My guess is you’ll see a set of measures that will be directed at containing this problem emerge over the next few years.”
Both economists warned the world could not expect much more growth driven by China, not because of its debt — they pointed out most of China’s debt is domestic and amounts to debt between government departments — but because China’s major growth drivers, such as the switch from a rural, low-productivity population to a highly productive urban population, were largely complete.
Dr Summers noted that China had grown so rapidly that its share of the global economy had doubled, and 5 per cent growth now had the same effect as 10 per cent growth a decade ago.
China’s convergence with the world economy was “low-hanging fruit” and expectations that it could continue its transformation were unrealistic because it had likely peaked.
“That’s why if you see a politician on the cover of Time magazine, their career is likely to go downhill.”
Dr Summers said he was confident central banks had found the right broad approach to ensure financial stability by insisting banks boost their capitalisation to help insulate them from crises, though some new regulations had made economies more sluggish.
“I have no doubt that the financial system would be far more fragile today than it was if we hadn’t taken those steps. Is it completely safe? No. Is complete safety obtainable? Probably not.”
Fact box: A brave new world?
Dr Nouriel Roubini, an economist nicknamed ‘Dr Doom’ and ‘Permabear’ for his often pessimistic outlook, revealed a vision of a bright future driven by innovation and new technology.
He said technological advances were likely to radically change the basis of the world economy for the next generation.
He pointed to six key areas of innovation: energy technology, with growing use of shale oil and alternative energy sources likely to reduce costs; biotechnology, likely to help people live longer and stay healthy; IT developments such as the cloud and the Internet of Things; manufacturing technology such as 3D printing; financial technology and information management; and defence technologies such as the growing use of drones.
“These are six areas that will radically change productivity,” he said.
“People say that in 15 years energy prices will collapse,” he said. “Once we have cheap energy we can have desalination.”
That would solve water and food shortages, paving the way for biotech advances. Productivity would boom.
“There is a brave new world coming in which things will be better in the future,” he said.