Over the last decade, Alandia has faced a sustained deceleration in its long-run productive capacity. Historically reliant on high-tech manufacturing, the economy has increasingly transitioned to low-productivity service sectors. Analysts highlight a double blow to the nation's supply side: first, a sharp contraction in corporate research and development (R&D) expenditure due to heightened risk aversion; second, a demographic cliff combined with strict net migration limits that has shrunk the active domestic labor force.
Furthermore, while the government has maintained a balanced budget, it has done so by slashing capital expenditure on regional transport grids and digital infrastructure in favor of rising entitlement and pension spending. Independent economic councils argue that this structural shift in public expenditure, combined with weak private sector capital deepening, explains why Alandia's long-term potential growth rate has been revised downward from 2.4% to 1.1%.
Question
Discuss the factors that might explain why Alandia’s long-term potential rate of economic growth has been revised downward (Extract C).
