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Two-speed economies: how do they work?

By Ed Sinclair, CA Today

How does a two-speed economy work in a global economy? We look at some of the best examples.

A ‘two-speed economy’ occurs where one sector of industry or business grows at a much more rapid rate than another – often masking the slow rate of growth in the smaller sector. From geographical variations in income and revenue growth, to the knock-on effects for markets such as housing and construction – there are both risks and rewards associated with the phenomenon.

The global perspective

Arguably, the world is now a two-speed economy, with recession-hit Western economies increasingly seeing their growth dwarfed by the emerging economies like Brazil, China and India.

In 2012, the predicted growth rate for developing nations was 6.2%, compared to the higher-income developed nations, who were forecast to grow at 2.2%.

China – managing growth

In China, growth has begun to slow, but the two-speed model still allows for careful planning. While China’s economy grew by 6.9% in 2015, its slowest expansion pace in 25 years, ongoing structural reforms have allowed the government to improve services and encourage consumption, meaning that growth can be seen to be stabilising over the long term.

Australia – a reversal of fortune

The two-speed economic model can produce unexpected results, affecting wealth distribution, job creation, and the sustainability and availability of credit, as recent developments in Australia have shown.

From 2002 to 2012, a boom in mining, construction and resources saw Queensland and Western Australia grow much faster than the rest of the country, which was negatively affected by a high dollar, driving down profit from export industries.

Since 2012 however, Queensland and WA are now experiencing a dramatic slow-down in growth, while Victoria and NSW have begun to grow much faster.

In 2015-16, real GDP grew by 2.8 % in Australia. NSW’s share of that growth was 3.5 %, Victoria’s 3.3 %. Queensland’s rate of growth was just 2 % with WA trailing at 1.9 %.

The two-speed economy in Australia has done a remarkable about face in less than half the time it took to establish itself during the boom.

Rural versus urban – two-speed Britain?

In the UK, a marked difference can be seen in terms of growth in London’s industries, commodity and property prices, and that of the rest of the UK – something that The Guardian recently inferred might be a political consequence of poor management of a two-speed economy, and even a decisive factor in the polarising Brexit vote.

China and the USA – clash of the titans

In theory, capable politics can manage the effects of a two-speed economy to stabilise growth in the long term. Countries can focus on lowering prices through wage reduction to compete globally until growth becomes sustainable.

But given the complex economic relationship between nation states, sometimes national aims conflict with global trends.

The US has less strict banking regulations and a looser economy than China, where public savings can be transferred easily from state managed banks into state owned enterprises, giving a tighter rein on industries like construction.

In the US, tighter banking regulations have raised costs and lowered credit availability for both businesses and individuals, in turn dampening job creation and innovation.

The challenge for the US is managing the increasing gap in growth between small firms, and larger corporations – but this could be a lengthy process. China meanwhile can rely on state intervention and targeted investment – but for how long?

A two-speed future?

The challenge of managing two-speed economies both nationally and at a global level is to find a compromise.

A holistic approach, looking at supply and demand both on a local and national scale, and in terms of interconnected economies, will always be necessary for those making decisions at the level of economic policy.

The aim must be to stimulate growth in areas facing economic slowdown whilst trying to avoid over inflation during an unexpected resource boom. This requires a dynamic approach, and one that must be fine-tuned constantly.

This article was originally published 9th June 2017 by ICAS. You can read the article and see the full edition here.