Changing the Traditional Model of Economic Development and Prospects for Escaping the “Stagnation Trap”

In the United States the situation is slightly better, but the American economy is being propped up by massive spending on artificial intelligence and the construction of data centers. In effect, this means that the model of economic growth that took shape after World War II and for decades ensured the well-being of the middle class is in deep crisis.

The war led to a serious realignment of forces in the global economy. The undisputed leader became the United States. Germany, Italy, Japan, France, and a number of other states suffered significant material losses, which was reflected in declines in their industrial and agricultural output.

From the moment hostilities ended, the process of rebuilding the economies of European states began. The weakening of private business and colossal material losses required active government intervention in economic recovery. This predetermined an increase in government regulation. States used direct methods of regulation. In the postwar years, Western European states sought to restore their devastated economies.

This involved nationalizing the most important industries and enterprises, and government funding of R&D. Other methods of state regulation were also employed, which predetermined the economic boom of the late 1960s, accompanied by a surge in consumer activity. Growing consumer demand led to rising production. During this period, the economies of Western European countries and the United States developed at a rapid pace. Against this background, Germany’s successes stood out in particular. In the economic literature of that period, the concept of the “German economic miracle” became firmly established.

The economic boom led to significant changes not only in the economy of Western Europe, but also in North America. The importance of the service sector in GDP production gradually increased, and more and more of the working-age population was employed in it. In the same period, the importance of agriculture began to decline due to a reduction in the number of economically active people in the agrarian sector, and its share in GDP decreased. In the industry of Western European countries and the United States, a structural restructuring of industrial production took place: traditional industries, including coal mining, textiles, shipbuilding, and metallurgy, were losing their importance. Gradually, the traditional strategic development model of European countries—focused on supplying finished products to the colonies and obtaining raw materials from them—was dismantled. As the domestic market became saturated, exports gained great importance as a stimulus for the development of national economies. By the end of the 20th century, roughly half of the industrial output produced by the Federal Republic of Germany was exported to various regions of the world.

Despite the significant development successes of the Western European economy in that period, strong structural distortions had already begun to manifest themselves, expressed in the process of deindustrialization of the economies of leading countries, as a result of which the share of services and finance in GDP increased even further. Germany, which plays the role of the locomotive of the European Union’s economy, faced a deep downturn in the industrial sector (symbolized by unprecedented cuts in the German automotive industry and the closure of Volkswagen plants). High energy costs made European manufacturing uncompetitive compared with the United States and China. The economic boom gave way to a period of “underinvestment,” a loss of global technology markets (including lagging behind in artificial intelligence), and Europe’s shift toward austerity and protectionism.

All of the above factors led to the breakdown of the current economic development model; countries are now in a transition to a new model based on the use of the latest technological advances, digitalization, and artificial intelligence. But this requires colossal energy expenditures, and due to the lack of its own energy capacity and the pursuit of a “green transition” policy, the same Germany has already ceased to be Europe’s leading economy. No less dramatic changes are taking place in other EU countries: rising inflation, rising public debt, and so on. All of this has led to the collapse of the familiar economic model and a sharp slowdown in economic growth in Europe and the United States.

Author: Doctor of Economics, Professor of the Department of World Economy and World Finance at the Financial University under the Government of the Russian Federation Marina Borisovna Medvedeva.