Davos 2020: Adair Turner Says India Shouldn’t Tell Itself ‘Silly Stories’ About Demographic Dividend

“India would have been in much better position if its birth rate had fallen at an earlier time,” Turner said.

24 Jan 2020, 07:44 PM IST

Adair Turner (Source: BloombergQuint)

India’s policymakers should “wake up to the severity” of the structural challenges posed by its growing working-age population as its top job-creating sectors will not be able to absorb such a large workforce, according to Adair Turner.

India’s labour force will continue to expand for the next 20 years, and it will be “incredibly difficult to absorb in an era of increasing automation possibilities”, the chairman of the Institute of New Economic Thinking and co-chair of the Energy Transitions Commission told BloombergQuint on the sidelines of the World Economic Forum 2020 in Davos, Switzerland.

Davos 2020: Adair Turner Says India Shouldn’t Tell Itself ‘Silly Stories’ About Demographic Dividend

India needs to accept that even its world-class companies in manufacturing sector, information technology and pharmaceuticals won’t create the required number of jobs, Turner, who is also the former chairman of U.K.’s Financial Services Authority, added. “It’s got to have another strategy for how it creates, by some other means, enough jobs for this still rapidly expanding labour force.”

The crucial thing for India is to wake up to the severity of the challenge and not tell itself silly stories that it’s getting a major advantage from a demographic dividend, because actually, it is getting a major disadvantage.

Adair Turner, Chairman, Institute of New Economic Thinking

According to Turner, India should focus on improving agriculture, supporting local services industries, and boosting tourism to create jobs.

This comes when India’s largest lender estimated that the nation will create at least 1.6 million fewer formal jobs across government and low-paying sectors, Bloomberg reported citing SBI’s report. Poor job creation risks worsening India’s highest unemployment rate in 45 years at a time it’s battling the weakest economic growth in more than a decade.

‘Concerning’ Slowdown

India is “undoubtedly” seeing a “significant slowdown”, Turner said, adding that it is “more concerning” than the downturn in China because it has occurred at a lower level of per capita gross domestic product.

Turner said while China—the world’s second-largest economy—too, is facing a significant slowdown, it’s more a “natural process” as an economy reaches a certain level of prosperity.

Monetary Policy Ammunition Over, Time For Fiscal Levers

According to Turner, “We have to realise that in an environment of what I believe is structurally low inflation and structurally low interest rates, we will have to rely more on the fiscal lever than the monetary lever if we face a significant slowdown rather than simply a moderate slowdown, which appears to be the case at the moment.”

There isn’t any ammunition left in the monetary locker in case there’s a downturn, he said, adding that the option of fiscal expansion, however, is not easily available to all economies.

While large economies such as the U.S. and China can run fiscal deficits, a medium or small-sized country is more constrained, he said. Europe can do more in this scenario, but “sadly I don’t think it’s going to”, he said.

Here are the other highlights from what Turner had to say:

Low Inflation, Low Rates Decade

Seeing very low rates of inflation around the world.
Once wage growth reaches a point where it can fuel inflation, businesses have the opportunity to automate.

I’d willing to take a reasonable bet for a bit of fun that we are in for very low interest rates, close to zero, for at least another decade, and then, who knows beyond that?

Adair Turner, Chairman, Institute of New Economic Thinking

Addressing Inequality

We have to fix the issue of inequality
Skilling alone can't be the solution to inequality
You do need an element of redistribution to address inequality
Don't need unnecessary levels of austerity; fiscal limits were overstated

There’s no magic bullet here.

Adair Turner, Chairman, Institute of New Economic Thinking

Towards A Zero Carbon Future

Increasing number of mainstream businesses are addressing the issue of climate change over the last two years.
Increasing set of companies are making strong commitments to be zero carbon by a future date, e.g. Microsoft, Maersk, ArcelorMittal's European unit.
There is a growing realisation that we do have the technology to get to a zero carbon future.
PM Modi has committed to significant increase in renewable energy deployment.
We are working with India to see how fast the country can go in that direction.
We can go faster on climate change in Europe, India, China without compromising growth
Building a zero-carbon economy will create a lot of jobs

If people think that the slowing economy is a reason to go slow on the progress towards a green economy, I think they’ve got it the wrong way around.

Adair Turner, Chairman, Institute of New Economic Thinking

Watch | Adair Turner speaks about India’s economy, jobs, global growth, climate change and more at Davos 2020.

BQ At Davos 2020: Related Coverage

Edited excerpts:

Are governments and businesses treating climate change as urgently as they need to?

Well, I think there has been a major change over the last two years, and you can see that reflected in this Davos programme. I think an increasing number of mainstream businesses are now really addressing the issue of climate change. They are aware that it’s serious. They are aware that their employees, and sometimes the CEOs’ own children, want them to take it seriously.

They are also taking the science seriously and seeing the business opportunities. What we’re seeing this reflected in is an increasing set of companies making strong commitments to be zero-carbon by some future date. We saw Microsoft saying that it will be carbon negative by 2030, but we’ve also seen some companies in really tricky difficult sectors of the economy like global shipping. Maersk- the biggest container shipping company in the world says it will be zero carbon by 2050. ArcelorMittal in its European steel business committed to being zero carbon by 2050. What that reflects is a growing realisation which my own Energy Transitions Commission has pushed forward that we do have the technologies to get to zero-carbon and that if we don’t move in that direction, we will do very severe damage to the climate and to human welfare.

So, I think that change has occurred and it’s a very welcome one.

Are you seeing governments work together on this, both in developing and developed nations? For instance, you’re doing a lot of work in India. Do you see governments coming together to approach this in a harmonised regulatory fashion?

Well, some governments are very committed to it. My own government in the U.K. has now passed an act of Parliament which legally commits us to be a zero-carbon economy by 2050 - with total cross-party support and full support from the new Prime Minister Boris Johnson. One of the few things that we completely agree on in the U.K. is we’re going to be zero carbon. We’re seeing the same in the EU as well.

In India where I work extensively and where I will be next week for two days with my co-chair of the Energy Transitions Commission, Ajay Mathur of TERI.

We are seeing significant government leadership and Prime Minister Modi has committed to significant increases in renewable energy deployment. We need to go further, and we are working in India with the details of how fast India can go.

I’m also working extensively in China. China is making major changes. It is not yet committed to being zero carbon by 2050, but it could undoubtedly achieve that. So, I would say that in Europe, in India and China - three main places where I’m working, we certainly have people accepting the science of climate change. The question is simply how fast can we go?

We are arguing that we can go pretty fast without any diminution in the growth or prosperity, particularly in the emerging markets.

In a slowing global economy, how much more difficult is it to champion this cause?

I don’t think the slow growth of the global economy in itself is a problem. I think where problems arise is if you have significant employment creation challenges, which we know we have in India in particular at this moment.

On the other hand, there really is nothing about moving towards a green economy which is going to be disadvantageous to job creation.

Installing solar panels is much more labour-intensive than running a coal-fired power station. So, at least in the transition, building a zero-carbon economy with the windmills, solar panels, better insulated houses, and more efficient air conditioning, will create a lot of jobs.

If people think that the slowing economy is a reason to go slow on the progress toward a green economy, I think they’ve got it the wrong way around.

I do want to get your broader views on the global economy right now and some critical issues that sort of faced us in the last decade and will continue to persist in this one. So, I’ll start with what you make of the multi-speed global economy that we’re seeing at this point in time and then some of the solutions; fiscal and monetary.

We are seeing a significant, though I wouldn’t overstate it, slowdown in China—the second-biggest economy in the world. It is going through a natural process of slowing down which always happens when you get to a certain level of prosperity. Maybe that slowdown has been bigger because of the tariff war; we’ll see what happens now.

India undoubtedly has a significant slowdown, in a sense, it’s more concerning because it’s occurred at a lower level of GDP per capita where India ought to be achieving a higher rate of growth. Europe is pretty slow, U.S. doing okay, I mean not at the pace we used to think it could achieve, but it’s doing okay.

Across the world, what we do see however is very low rates of inflation and we have very low interest rates.

So, the big worry that a lot of people talk about is if we get a downturn, what are we going to do about it? Because, there isn’t any ammunition left in the monetary locker.

I think however what we know from the history of the last four years is that the thing that has kept the global economy going is actually fiscal expansion. So, it’s been a big fiscal expansion in the U.S., a big fiscal expansion in China.

I think we have to realise that in an environment of structurally low inflation and structurally low interest rates, we will have to rely more on the fiscal lever than the monetary lever if we face a significant slowdown rather than simply a moderate slowdown, which appears to be the case at the moment.

The structurally low inflation—do you believe it will persist through the course of this decade? Is this a reset in the way we view inflation?

Look, I think there are a set of structural factors at work which are producing both low inflation and very low real interest rates. I think often we ignore the experience of Japan because we think Japan is a thing in itself, it has its own rules. But I think that’s wrong. I think Japan tells us quite a lot that can happen to mature, rich economies with demographic slowdown in the modern world of robots etc. And Japan has had interest rates at zero for almost 30 years now. We’ve had them in the Western developed countries for ten years now.

On interest rates I would be willing to take a reasonable bet for a bit of fun that we are in for very low interest rates, close to zero, for at least another decade and then who knows beyond that?

With regards to inflation, what I believe is the most fundamental factor is the potential for automation and the potential for robotization. I think we see this in wage behaviour across the world.

The moment wage growth gets to the sort of levels that it can generate significant inflation, businesses have opportunities to automate.

We see this in particular in India. I mean, India is a country of very fine globally competitive companies, but it’s also surrounded by an enormous ocean of available cheap labour. But these globally competitive companies - they’re not going to employ more labour. What they’re going to do is keep automating because automation often is best for quality as well.

So, I think we have failed to realise how deep the impact of information technology, artificial intelligence, automation and robotisation is. I think that has created a more deep structural driver for low inflation and low interest rates than many people have realised.

You spoke of fiscal expansion, but many developed nations are deep in debt. How does that problem resolve itself over the next decade?

That is absolutely right. I think the unfair thing about the world is that your capacity to use fiscal expansion is very unequal between big continental scale economies and small economies.

If you are the U.S. or if you are China, and you want to run a fiscal deficit of 4 or 5 percent of GDP, you will be able to do it. Either because in China there’s an enormous domestic savings rate which will absorb that debt, or in America, because of what people have sometimes called the exorbitant privilege of being the reserve currency of the world. People will always buy American debt because they want dollar assets.

If you are a medium or a small-sized country, you are more constrained. That’s a fact.

In the past, it’s been extreme for relatively small countries in the developed economies which are subject to financial crisis for fiscal behaviour which wouldn’t have made the slightest bit of difference in America. Now, that means that countries which are in that other category, they have to very carefully balance their policy to take account of those debt risks.

But if neither the U.S. nor China, at least this year or next, are likely to run a deeply expansionary fiscal policy.

It probably means there will be a slowdown of global growth. I mean, I do think this is what we’ve seen in the latest IMF forecast. It is not a catastrophe, not a recession forecast but a slowdown of the rate of growth. Realistically, that is what we are looking at now.

I think the big economy which could do much more is of course Europe and the Euro-zone. The problem in Europe and the Euro-zone is that it tries to keep its economy going as an export economy and when the global economy slows down, the German motor slows down. Germany because of its fixation with debt, is unwilling to use the fiscal lever which is available. I mean Germany is not a country constrained by a high level of debt. It could and it should run a bigger fiscal deficit, but there is this bias towards a low-debt focus.

Europe’s economy, when it does well, it usually does well with a whacking great current account surplus. Now when you’ve got a whacking great current account surplus, what that says is you are reliant on somebody else in the rest of the world creating the demand.

I think the big economy which has the potential to support more growth apart from China and the U.S. is Europe. Sadly, I don’t think Europe’s going to, because there are structural issues about the way the Euro-zone works, with one central bank and multiple fiscal authorities, which I think creates a somewhat of a deflationary bias.

Where does that leave India? You’re familiar with India. We just clocked 5 percent growth, that’s nowhere near sufficient for an economy of our size, for a labour pool of our size.

India faces a major structural challenge. I have a different point of view from many people when they look at India. There is still a tendency in India to say what a great demographic dividend we have from this rapidly expanding youthful population.

I think India would be in a much better position if its birth rate had fallen at an earlier time.

I think it is now creating and will create for the next 20 years and expansion of the working-age workforce which I think is incredibly difficult to absorb in an era of increasing automation possibilities.

So, I think India needs to balance policies which enable its world-class manufacturing sector, its well-known companies, its information technology back offices, Infosys etc., to flourish, but also realise that, they’re not going to create tens of millions of jobs. They’re just not going to. It’s got to have another strategy for how it creates, by some other means enough jobs for this still rapidly expanding labour force. But I think the crucial thing for India, is to wake up to the severity of the challenge and not tell itself silly stories that is getting a major advantage from a demographic dividend, because actually, it is getting a major disadvantage.

What could those options be for jobs?

How do you create jobs like that? To create jobs, you have to have a flourishing agricultural sector, you have to create local service jobs, you have to create tourism which tends to be a job creator. You’ve got to look at the sectors which are capable of creating jobs, but you’ve also got to realise that, the well-run companies in IT, pharmaceuticals, and in manufacturing, are not going to create a lot of jobs.

You’re going to create some, but not nearly enough to absorb the expansion of the Indian labour force.

One final question, you’ve been saying for a while now, along with many other leading economic thinkers that capitalism is broke. In this decade, what changes are we going to see in the way economic and monetary policy is thought through and implemented, that will serve us better in the years to come?

I think it was broke before the financial crisis of 2008 because we let rip a completely deregulated global financial sector. We told ourselves ludicrous stories that this was making the world a more efficient place and actually it was just a time bomb waiting to blow up.

I think we’ve made progress—some progress but not enough over the last 10 years though in making the financial system safer and preventing that big negative.

We have continued to see high levels of inequality and we’ve really got to fix this issue of inequality. We’ve got to be honest with ourselves, particularly here at Davos, which broadly speaking is for the winners and not the losers. There’s a very easy answer to inequality, but I think it’s facile which is, let’s give everybody skills.

If you asked lots of people what’s the answer to inequality, they’ll say skills. Nobody’s more passionate about skills than I am, but I don’t think it’s going to provide the answer. I think you do need an element of redistribution.

You need to take some tax revenue from richer people and make sure that you are providing public services that enable other people to live even if their wages are relatively low. I think we’ve got to be honest with ourselves about that sort of challenge.

I think we’ve got to not shoot ourselves in the foot with unnecessary levels of austerity. I think we overdid it in some countries. I mean, of course there are fiscal limits out there, but I think we overstated them in a way which made growth unnecessarily slow. So, there’s no magic bullet here.

I mean you’ve got to look at all the ways in which the capitalism, of the last 20 years leading up to 2008, tended to be less stable. We’ve got more stability now, but more inequality too, and we’ve got to just work through specific policies which will least ameliorate that, even if they won’t make it perfect.