Wednesday, October 5, 2011

Great Stagnation ... or Great Relocation?

An interesting post in Noahpinion on why the center of gravity of economic activity and growth is shifting from the rich West, and especially the US, to emerging Asia.

While Tyler Cowen (Marginal Revolution) explains in his book The Great Stagnation that slowing income growth in the US is due to a slowing down of innovation and scientific discovery, Noah’s hypothesis is that growing income per capita in the East, multiplied by a very large population, makes for larger markets there that exert an irresistible pull on firms and economic activity away from the West. This is the “Great Relocation” thesis, and I find it rather persuasive.

Among the measures he suggests to reverse the trend I would support the idea of increasing the population through immigration and that of concluding free trade deals with other rich countries.

My criticism however is that much of Asia’s growth is simply due to the catching up of US income level phenomenon, and as such is a transitory phase that does not necessarily implies a fall in the American income per capita. That was already the case of Western Europe after the war, and then of Japan. And in these latter cases the catching up didn’t affect the leading position and continued progress of the US economy. This is not a zero sum game but a transition towards a new, higher income level, equilibrium for all. It only means that the acceleration of delocalization of low wages industries and firms create a need for new, high technology industries, that requires a high-quality economic environment, in the West.

So that, I would call the present transformation one of Great Reallocation (or Great Restructuration) rather than a Great Stagnation or a Great Relocation one. And in that perspective, the US entrepreneurs will find new products and processes to replace departed activities, sooner or later, but as in previous economic revolutions it is impossible for us to imagine them in advance. This is precisely the painstaking day-to-day job of innovators and entrepreneurs. It has been done several times in the past and it will happen again in the future.

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