Photo: Charlie Rose via YouTube
In his latest Viewpoints note, Jim O’Neill revisits two major research notes published this week by Goldman Sachs’ research teams. The first titled Our 2011 GES: A Sharper Signal For Growth by Trivedi, Carlson and Ursua. The second titled The Long Good Buy, The Case For Equities by Peter Oppenheimer.Business Insider readers already know that we’ve already spent plenty of time on the latter paper. So we’ll focus on the first.
O’Neill introduces the first paper by pointing out that there are two key variables that are crucial to GDP growth:
To achieve a strong real GDP growth rate, two ingredients are vital. Without them, sustained growth is not possible. One is the size of the country’s labour force, and the other is the nation’s productivity. Countries with small populations and /or declining work forces require exceptionally strong productivity to grow well. Conversely, those with big work forces, if you can be inventive and have all the conditions for productivity, then strong real GDP growth is a bit of doddle.
The demographic factor is obviously determined by the birth and death rate, and retirement age, and it is quite easy to have some confidence around countries future work force potential, at least for a couple of decades. Amongst large nations, this is why some of the Growth Markets, especially India, Indonesia and Turkey look so interesting and, within the G7, the US. It is a key issue as to why Japan seems so challenged. And importantly within the European Monetary Union members, it is a big issue for many of them, notably Italy and Germany.
The productivity factor is a lot trickier and, as demonstrated by the GS paper on GES scores, there are many variables that are relevant. Their updated approach now includes 18 variables, although the past scores correlate closely with the expanded approach.
GES is short for Growth Environment Score, Goldman’s proprietary method for scoring regional productivity.
O’Neill notes that the Euro Area and Greece in particular score below average in these areas. As such, he argues that they desperately need to address productivity issues in order to get their economies back on track.
While unlike their deficits and debt/GDP ratio, the updated average GES score for the Euro Area is lower than for the US, UK and Japan, at 6.5 compared to 7.0, 6.8 and 6.7 respectively. At the margin, this could support those that believe the real solution to the Euro Area’s challenges are higher productivity, not excessive fiscal tightening.
Ireland and all the Club Med members are below the average. And most importantly, Greece at 5.0 is a full 1.5 points below the average. It scores 89th out of 183 countries, and from the BRIC and N11 world, Korea, Vietnam, China and Brazil are all higher.
These results are quite revealing and tell a clear message. The weaker scoring countries need productivity improvements to get growth, not just fiscal austerity. And in fact, perhaps not even that much fiscal austerity.
In short, the obsession with austerity is short-sighted. Leaders need growth, and in order to achieve it, they need to address productivity.