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Global Warming, Aging to Hit Global Growth: OECD
Source: cnbc.com
Source Date: Wednesday, July 02, 2014
Created: Jul 08, 2014

An aging population combined with a slowdown in emerging markets and pressure on the environment will lead to lower global growth and rising income inequality, a new OECD report warns.

The organization expects global growth is to slow from 3.6 percent in 2010-2020 to 2.4 percent in 2050- 2060. Such growth rates will still mean that global economic output will more than quadruple over the coming 50 years.

Current "deep-seated" trends such as an aging population, skill-biased technological change, globalization and rising environmental pressures are likely to have a profound impact on the world economy – with global warming expected to curb global growth by 1.5 percent on average – and raise difficult policy challenges.

"OECD countries will be hit by a double demographic shock", the OECD writes. As the global economic balance shift towards the non-OECD area, the demand for high-skilled workers will start to harmonize and the income gap between developed and emerging economies will continue to shrink.

With less incentive for economic migration, work-related immigration towards the OECD area will slow and, coupled with the aging trend already observed in advanced and many emerging economies, will lead to a reduced labor force.

By 2060, the OECD estimates that the labor force in the euro area will be 20 percent lower than it is today, while in the U.S., a 15 percent decline is anticipated.

At the same time, economic interdependency between OECD and non-OECD countries is likely to increase, the report states, with about 50 percent of world trade taking place among current non-OECD economies, up from today's 25 percent.

Asian and African economies should be major beneficiaries with GDP per capita expected to increase sevenfold in India and some African countries by 2060, while China's GDP per capita should be comparable to the current U.S. levels. As a result, the think tank says, the "share of non-OECD countries in world GDP will significantly exceed that of the current OECD members".

However, with global growth increasingly driven by innovation and investment in skills, the growing importance of skill-biased technological progress will lead to "continued polarization " on earnings growth.

The group estimates that with unchanged redistributive policies, pre-tax earnings inequality in the average OECD country will have risen by 30 percent which could "backlash on growth, notably if they reduce economic opportunities available to low-income talented individuals".

The recommendations

To curb the negative effect of the "double demographic shock" facing OECD economies, the think tank encourages countries to postpone the retirement age and provide the work force with "stronger work incentives at old age".

"Learning strategies" should be supported to ease transition from job to job and keep the work force flexible and more able to cope with structural change.

Economies should implement policies to support the knowledge-based growth, such as easy entry for new firms but also easy exit for ailing companies by, for instance, reforming bankruptcy laws, the OECD advises.

The keys to tackle the widening earnings inequalities, says the OECD, are better redistributive policies, enhanced focus on equality of opportunities and reviewing both funding mechanisms (for education) and tax structures, according to the rich-country club.

But most importantly, cooperation on trade policy "will become most important" as international coordination and cooperation could enhance research and spur technological innovation.

Multilateral trade liberalization should be encouraged, according to the think tank, as it will "bring the greatest global GDP and welfare gains by 2060".

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