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Why we need to shift to investment-led growth: Sachs

Jeffrey Sachs, Director of The Earth Institute, Columbia University
Wednesday, 22 Jan 2014 | 1:00 AM ET
Jeffrey Sachs of the Earth Institute, Columbia University
Ted Aljibe | AFP | GettyImages
Jeffrey Sachs of the Earth Institute, Columbia University

The biggest economic opportunity in the world is to invest in a new generation of smart, sustainable technologies.

Innovations such as electric vehicles, smart grids, green buildings, climate-resilient agriculture, low-cost healthcare delivery,and high-performance robotics have the potential to advance rapidly in conjunction with the ongoing revolutions in information and communications technologies, materials science, and genomics. These new sectors are the key to new job creation, improved living standards, and environmental sustainability.

On the other hand, the biggest economic threat is that the world misses out on this opportunity for smart, green, investment-led growth because of shortsightedness, poor governance, and corruption. Alas, so far we've been missing the point, debating fatuous policies like short-run consumption stimulus.

(Read more: IMF upgrades world growth forecast to 3.7% in 2014)

Let us start with shortsightedness. Excessive short-termism is endemic in mainstream economics, politics, and finance. Everybody is looking for quick returns and immediate pay-offs. We end up with "stimulus packages" based on ³shovel-ready projects² which do nothing for long-term growth. The new technological revolution certainly cannot be built with "shovel-ready" projects.

Real economic growth is built not on Keynesian stimulus but on sustained investments in new technologies over the course of decades. Such an era of investment-led growth does not occur by market forces alone.

From the first wave of steam power in the late 18th century, through 19th century railroads and industrial chemistry, to 20th century automobiles, aviation, electrification and the computer age, each wave of technological change and investment-led growth has involved a complex interplay of government and industry. Governments provide upgraded infrastructure, public lands, legal institutions and support for science.

Industry, on the other side, provides new business models, organisation forms, and rapid diffusion of the new technologies through market-based, profit-seeking investments.

(Read more: 1930s-style debt defaults likely, says IMF research)

Seen in this light, government incapacity is the second big obstacle to investment-led growth. Most governments, including the US Government, seem to have forgotten how to think and plan ahead, even in areas like public infrastructure. Of course there have been brilliant exceptions to the rule such as continuing US Government leadership in the information sciences, health sciences, and space exploration. However, the White House and Congress no longer support the long-term thinking, planning, budgets and public investments needed for true, large-scale technological transformations. The same incapacity is true in many other major economies.

Corruption constitutes the third barrier to investment-led growth. Many economies are unable to move forward because their politicians are on the take. In some cases, the bribery is personal: to enrich the politicians and their families. In others (such as in the US), the payoffs are more businesslike: to finance election campaigns. Yet the outcome is distressingly similar: the political system protects existing interests at the expense of long-term growth. None of this is helped by the extent of lawlessness of the financial system, which compounds the public-sector corruption, and magnifies the short-termism of the marketplace.

(Read more: Study details rampant government corruption worldwide)

Short-term stimulus has failed. It's time to think and plan ahead for the long term. It's time to revive rather than slash public investments, to foster long-term technological upgrading and environmental sustainability. Countries that fail in this task will squander their own future prosperity and add to the rapidly rising environmental threats to the planet.

Jeffrey Sachs is Director of The Earth Institute at Columbia University and author of several books including "The End of Poverty". Follow him @JeffDSachs


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