We Need a New Growth Compact
Source details
- Canonical URL
- We Need a New Growth Compact
Other formats
Bibliographic details
- Authors: Pierre-Olivier Gourinchas
- Published: June 2, 2025
Diagnosis: weak growth and its drivers
- Global growth has steadily slowed and the outlook continues to weaken.
- Economists decompose growth into three inputs: labor; capital (including land); and total factor productivity (TFP).
- More than half of the growth lost since the crisis was driven by slowing total factor productivity growth.
- Productivity can be raised by addressing entrenched structural constraints that hold back innovation and by exploiting recent technological breakthroughs.
Regulatory safeguards and allocative efficiency
- The United States has improved efficiency in resource allocation, contributing positively to productivity growth.
- Many other countries face frictions—regulatory barriers and financing constraints—that reduce flexibility and have become more binding.
- Quantified illustrative impact:
- If other countries narrowed their allocative efficiency gap with the US by only about 15 percent, they could raise their productivity growth and investment enough to add about 1.2 percentage points to global growth annually.
- Regulatory trade-offs:
- Some regulations are essential (for example, financial regulation highlighted by the global financial crisis and the collapse of Silicon Valley Bank), while others protect incumbents, stifle competition, or are outdated.
- Removing export restrictions or other frictions "the right way" can produce economy-wide benefits that outweigh concentrated costs (example: Argentina leather export restrictions and resulting distortions).
Technological change and AI
- The artificial intelligence revolution could transform work; AI’s boost to labor productivity is uncertain but potentially substantial depending on adoption by workers.
- Development cost dynamics:
- Some newer models, including DeepSeek and Mistral, have much lower development costs, signalling ongoing rapid change.
- The cost of generative AI is said to be dropping by a factor of 10 each year, according to some estimates.
- Policy and institutional choices will shape how much growth AI ultimately delivers and how societal transformations are managed.
Global integration, trade, and value chains
- Long-run trends:
- World trade has increased fivefold in real terms since 1980.
- The share of trade in global output expanded to 60 percent from 36 percent.
- Lower trade costs increased global GDP by 6.8 percent in real terms between 1995 and 2020.
- Low-income countries saw a rise of 33 percent in GDP attributable to lower trade costs between 1995 and 2020.
- Recent geopolitical shifts:
- Over the past 15 years, threats to the free flow of capital, goods, and people have intensified as geopolitical risks have grown.
- Despite headwinds, global trade has remained constant in relation to economic output, muting the global-level impact of geopolitical shifts.
- The composition of trade is changing rapidly as a realignment takes place.
- Role of connector countries:
- Multinational firms have moved production to connector countries—Mexico, Morocco, and Vietnam—that trade freely with both Western and China-led blocs.
- Connector countries have moved up the value chain, helping absorb trade diversion and supporting ongoing global trade and investment.
- Costs of fragmentation:
- Stretched supply chains can be more inefficient and vulnerable.
- Increased opacity in trade and financial flows makes spotting risks harder.
- Too much trade disruption will diminish global growth and prosperity.
Distributional impacts and political economy
- Trade integration has not been the dominant driver of rising within-country inequalities; technological progress had a much larger impact.
- Trade shocks can still hurt specific workers and communities; perceptions of lost jobs and the speed of economic transformation matter for social and political reactions.
- Rapid technological change, notably from AI, risks major dislocations if unattended, increasing political blowback.
Policy recommendations and structural reforms
- Structural reforms can reinvigorate growth; specific policy directions highlighted:
- Ease worker mobility across employers, industries, and regions to minimize trade adjustment costs and promote employment.
- Implement compensatory measures targeted at the most vulnerable.
- Help workers adapt and sharpen skills to facilitate transitions and boost public support for reforms.
- Assess regulatory guardrails against their broader welfare costs, balancing protection with the need to avoid stifling innovation and competition.
- Trade integration and expansion should be pursued insofar as they support employment and improved living standards; carefully calibrated policy can help attain these goals.
Source: Pierre-Olivier Gourinchas, "We Need a New Growth Compact", F&D Magazine, June 2025; draws on lecture at the Oxford Union on February 24, 2025.
Content in this bundle
- We Need a New Growth Compact