THE world is facing a growth crisis. At the end of 2016, India is still the world’s fastest-growing large economy, but in a global economy that increasingly seems to struggle to find growth in the first place.

The reasons for this growth crisis seem to differ in different places. The country that has driven much recent global growth, the People’s Republic of China, may have reached the limits of its state-driven, infrastructure-first, investment-heavy economic model. It has been left with excess investment, infrastructure that is still a long way away from being useful, and a corruption crisis born of the excessive power held by local party officials over the economy. The long promised ‘balancing’ away to a different sort of model – emphasizing the private sector instead of the public sector, and led by domestic consumption instead of investment or trade – is inevitable. But it will involve a slowdown in growth, as it is traditionally measured. And because China’s commodity-heavy model has lost momentum, big commodity exporters like Brazil and South Africa have seen their own economies stumble.

Europe is yet to meaningfully recover from its debt crisis. The euro zone’s real output is barely higher today than it was before the 2008 crisis. This is partly self-inflicted; domestic demand in the euro zone countries, taken together, may in fact be lower than it was then. And, in fact, yet more trouble lies in the future. Its third largest economy, Italy, has debt problems that have destabilized its politics and led it into conflict with European Union rules. Further, it is on a collision course with its second largest, France – French banks are big owners of Italian debt. Someone will have to pay for the mistakes of the past, and prepare Europe for the economy of the future – but who pays will be a political decision, and while the politics sorts itself out, growth will suffer again. Meanwhile, Europe’s population – like Japan’s – is aging, and losing the obvious dynamism and galloping consumer demand for goods provided by youthful demographics.

The United States – a success story over the past few years – will have its own troubles. Growth in the US has been concentrated on the coasts and in the Sun Belt in the southwest. It is an urban phenomenon, and has depended crucially on global links – on immigration and trade. The election of Donald Trump has thrown a spanner in the works. Trump will feel the need to respond to the demands of his angry voters in the US’ Rust Belt, the vast swathe of Midwestern and Great Lakes states where growth has not been as dynamic. Policies that seek to reverse the US’ openness will inevitably damage its growth prospects.

And finally, there’s India. Even before the ill-thought-out demonetization experiment, Indian growth had in fact been weak. Investment, measured as gross fixed capital formation, shrank for three quarters in 2016. The government has sought to replace, through spending on infrastructure, the private sector’s unwillingness to invest. But given the relatively paltry resources of India’s government when compared to the size of its economy, this process is doomed to fail.

 

In each of these geographies, the apparent causes for growth weaknesses are different. But, in fact, many of the reasons are linked. At least three major processes have combined to cause the crisis. For one, the explosive growth of China over the past two decades has built up enormous excess manufacturing capacity in the People’s Republic and tight supply chains organized around that capacity. As a consequence, investment in manufacturing in places like India is rarely remunerative enough to be attractive. China itself is struggling to shut down its excess capacity. And former manufacturing hubs, like the US’ Rust Belt, have seen industrial towns fall into disrepair (hence the name).

Second, the impetus to productivity and growth provided by the information technology revolution may be slowing. It improved business processes, enabled some offshoring and tighter supply chains. It reduced costs and raised the productivity of those workers who could survive in the new, tech-enabled world. But this may have been a one-time boost – albeit spread over a couple of decades – instead of a continual process. It will not recover steam until the benefits of technology are spread more widely, to those still disconnected.

And third, increasing automation – a process that is far from complete, and may take a generation to truly alter the world’s factories – has meant that the future of manufacturing has been rendered uncertain. Growth has traditionally come from building factories that employ workers who generate the demand for the products of those factories. Automation interrupts and breaks that chain. Instead of value from manufacturing accruing to workers who become a new middle class, it will eventually flow to the owners of the intellectual property behind the automation.

These three processes are central to the crisis of growth. But does that mean that the decades of economic history in which growth was taken for granted have come to an end? It would in fact be premature to assume that this is so. Growth only ends when innovation ends, and humanity shows no signs of being less innovative today than it was a century ago. Some have argued that the big advances of the past centuries – electricity, penicillin, the locomotive, the telephone, the Internet – have few successors in the offing. But transformational technologies, by definition, tend to be hard to predict.

 

Even so, let’s try to go behind the veil and figure out exactly why these innovations made a difference to growth. Some of them (electricity, penicillin) raised the capabilities of individuals and firms. Others (trains, the Internet) helped link individuals and firms together. Are there processes we can already see underway that may have similar effects?

At least one can, indeed, be identified as such. It is likely that the mobile phone revolution, when combined with broadband, will both raise capabilities and increase linkages exponentially. This will be a different order of connectivity from that provided by the fixed line Internet of the past. It will spread to areas where fixed line internet failed. Nor is it fair to measure its possible impact purely by its effects on areas where fixed line internet penetration was already great. In developed countries, mobile broadband has indeed been a growth enhancer – but essentially as an add-on, a possible source of new and intriguing apps. In places exposed to mobile broadband before they are to other forms of the Internet, alternative possibilities will be opened up for productivity enhancement and growth.

 

Across the hitherto disconnected parts of countries like India, young people are obtaining access to the outside world for the first time. Their relationship to the online world will be substantively different from their counterparts in the West. Yes, the West’s ‘millennials’ live largely online. But they do not do so in every way that matters for the economy. Their expectations about how they will shape their own future prosperity are shaped by offline institutions, infrastructure and networks. By comparison, it is likely that a young person in India will soon find their first experience of education online, their first attempt at formal finance online, and their first interaction with their government online. Many will use the information superhighway before they use a highway.

The limitations of the current digital economy in this respect are easy to see in a place like India. True product innovation is possible only when the innovator is a user of the technology, and can clearly see how it would impact her lifestyle, or that of people like her. India’s current start-up economy, run by its upper middle class and financed by the global elite, is naturally at a disadvantage in this respect. Its products will not achieve the take-up that leads to explosive growth until they are created instead by precisely the people who will eventually use them at scale – young people from Bundelkhand, say, instead of Bangalore.

The eventual impact of this explosion of connectedness is hard to determine, but there is little doubt that it is one of the primary places we must look for future sources of growth. The idea of growth producing innovation that we have hitherto lived with (a big idea from a lab or an inventor that spreads across the economy) may no longer be relevant. Innovation may now emerge from these more diffuse networks. The strength of these networks, their expansion, and their empowerment, should be a crucial policy goal.

 

The crisis of growth, and the emergence of new forms of growth, also reveals the limitations of the mechanisms we currently use to evaluate growth. Since decolonization in the 1950s and the growth of international comparisons, changes in gross domestic product or GDP has been the favoured way to measure economic progress. This works very well indeed to measure enhancement of physical infrastructure and production. It does less well in measuring services. And it fails miserably when it comes to measuring the true cost of, say, natural resource use.

Growth hitherto has been relatively easy to account for: it is growth in things. GDP measures the resources poured into products and services, or the prices people pay for it, and how these have changed over time. What if innovation is frugal, and costs are reduced, and relative prices do not change? What if resources in the future are poured into quality, into diversity, into sustainability? Changes in these are harder to account for.

 

Consider the uselessness of GDP growth as an indicator when it comes to dealing with important issues that directly impact productivity in today’s India. Take just two examples. First, consider Delhi’s chronic air pollution problem. Delhi is facing a long-drawn-out public health crisis, caused by the worst levels of particulate air pollution in the world. The impacts on workforce productivity over time are dire. In order to clean up Delhi’s air, efforts will have to be made to better regulate the construction industry; to minimize the use of private automobiles for transport; to divert trucking traffic; to end the burning of agricultural waste in neighbouring states; and so on. In analyzing this problem, however, the costs of action are clearly accountable. The government will have to pay Punjab’s farmers to stop burning waste. Truckers will have to pay extra to avoid Delhi, and so on. Thus the negative impact on GDP of these measures will clearly be observed. The benefits, though no less tangible and considerably more impactful, are difficult to directly account for. The productivity loss thanks to bad air is nearly impossible to directly quantify. Further, any innovation which benefits the air but has clearly defined costs will not be seen as growth-improving if strict GDP accounting is used.

Advanced economies have their own variation of this problem. GDP struggles to properly reflect the changes in ‘value’ that improved quality provides. For example, an iPhone 7, as opposed to an iPhone 5, provides greater value. But GDP only captures that proportion of value increase that comes from paying more for an iPhone 7, or the extra effort that producing it has taken. Much has been written of late of stagnant real incomes in part of the western world. Yet this stagnation does not take into account quality improvements – or the provision of free goods. The ubiquity of smartphone cameras, for example, is equivalent to giving almost everyone in the West a high-end Leica in the 1960s. That act would have been seen as a big expansion in GDP, but bundling essentially free, high quality cameras with phones provides a much smaller bump in comparison. Or consider Wikipedia. It has replaced dozens of million selling reference books. This, on the GDP scale, would look like value destruction – but it is in fact anything but that.

Future innovation in aging societies in Europe and Japan may, in addition, not focus on more ‘things’ or on producing more goods, but in increasing the availability and quality of health care, for example. But such care is notoriously difficult to price, and thus extremely difficult to account for in GDP.

 

Finally, consider an example that is particularly current: the Indian government’s decision to withdraw Rs 500 and Rs 1,000 notes from circulation overnight. The Reserve Bank of India’s official estimate of the cost of this exercise is that it will reduce GDP growth by as little as 0.15 percentage points. This figure may well be borne out by the eventual national income statistics. Naturally, this does not properly capture the immense inconvenience and loss of productivity caused by the process, including the cost of standing in line or of struggling to arrange for payment. However, the problem clearly goes even deeper.

A measure like demonetization hits the informal economy first – those sections of the Indian economy that are smaller in scale, less connected to organized credit and so on. But it is precisely these sectors that are also undercounted by GDP, which finds it much easier to quantify value created by the formal sector. In general, when growth enhancing policy is being searched for, since the traditional methods of counting GDP underplay the importance of the formal sector, the eventual choice of policy will end up poorly informed and biased. If major productivity pushing innovation in the future occurs through loose and informal networks, as I have hypothesized above, then traditional measures of GDP will not reflect that innovation, and traditional evaluations of policy will choke that innovation.

 

Other more straightforward limitations of GDP accounting have already been generally understood and studied. For example, the depletion of natural resources adds to GDP, with no commensurate costs. Only one side of the equation – the increase in output thanks to the use of the resource – is accounted for. A resource intensive development model, such as used by China, for example, will score very heavily on the GDP scale. Moving to a more sustainable model, which does not spend natural resources profligately, will be seen by traditional accounting as reducing growth. Unless this is reversed, such innovations and transformations, although they are capable of being major sources of economic progress, will be de-emphasized as sources of growth. Already in some parts of the world attempts have been made to create a ‘national balance sheet’ that incorporates natural resources, including such things as clean air. Changes in the national balance sheet would more clearly reveal the sources and direction of growth than looking at GDP.

Finally, of course, there is the common complaint that GDP is an average – it provides no information about the variation of output and income over geographies and between individuals. Many attempts have been made to address this, such as looking mainly at median income or at measures of inequality. But when it comes to accounting for 21st century innovation and changes to quality of life, the ‘averaging’ nature of GDP might be particularly pernicious – if, that is, empowered and large networks are more capable of providing such innovation and changes.

 

In essence, part of the crisis of growth is born of the GDP illusion. The real quality of life may have continued to rise even in areas where GDP has appeared to be stagnant. And growth may spread in areas which have previously been stagnant, but it may be missed by traditional accounting. Finally, policies that produce growth may be missed or de-emphasized if they focus purely on a limited conception of GDP based growth.

Most importantly, the growth creating processes of the future should not be prejudged. If the changes in the future will come from localization, or from quality changes, or from network enhancement and so on, then they will be hard to anticipate. Governments should avoid the temptation to do so.

It is fashionable at the moment to declare the end of growth. But growth will only end when individuals stop striving to improve their lives. The purpose of policy must to be allow individuals fuller and freer rein in this effort; and to provide them with support. Increases in living standards must be better measured, so that resources and intellectual effort are not misallocated trying to resuscitate growth models that are past their prime. Most of all, we should be open to the idea that growth and innovation in the future will not come from the areas that they have in the past, or in the form that they have in the past.