By P.K.Balachandran/Daily Express
Every country is eager to increase its Gross Domestic Product (GDP) and step up the rate of GDP growth because these are seen as being necessary to ensure all-round happiness. But decades of dedicated research across the world have not enabled economists to know the one main factor which enables the GDP to grow and grow at a faster pace, say Nobel Laureates Abhijit V.Banerjee and Esther Duflo.
As to why some economies grow and others don’t, also remains a mystery, the duo say in their paper entitled “How Poverty Ends” in Foreign Affairs.
Banerjee and Duflo point out that growth rates rise and fall even if conditions remain the same. William Easterly found that Brazil’s GDP grew in the 1960s and 1970s, only to fall in the 1980s “without much apparant change in anything else.”
Giving another example, Banerjee and Duflo point to Bangladesh’s astounding growth from being a “basket case” to being a South Asian tiger. Bangladesh grew at 5% between 1990 and 2015 and has been growing at 7% since 2016. It is now aiming at 8%, the highest in South Asia. But the two Nobel Laureates observe that in the case of Brazil and Bangladesh “ growth came and went without any obvious reason.”
However, in the process of finding out the basic reason for growth or decline, it has been discovered that many variables are involved and that these are inter-connected.
If improved education is a factor in economic growth, it could be linked to better health or better road transport. A healthier family, which has an educational facility made reachable by a good transport network, will be more inclined to send its children to school or college than a weak and undernourished family living in an inaccessible area.
In this context, China’s rise as an economic giant is worth looking at. When Deng Xiaoping took over the leadership of the country, China was dirt poor, but it had comparatively good education and health care. These conditions gave Deng a good foundation to build on. And today, China is an economic powerhouse. It is the world’s single largest exporter and is the second biggest economy after the US.
Banerjee and Duflo also observe that a rational allocation of available resources is critical to development. “This is particularly true in developing countries, where many markets such as those for credit, land or labor, function poorly. The problem is not that talent, technology and capital are not available, but that the economy does not appear to put them to their best use.”
In India, for example, young men and women study engineering or medicine because these subjects are considered prestigious. But they do not want to work in grimy factories and dirty hospitals under harsh conditions. Working in such places is not considered prestigious enough or worthy of a scion from a family of high status or high caste. What is preferred is a white collar job. With the result, after passing out of an engineering college, students go for a management degree or join the bureaucracy. Therefore, even as India boasts of a very high number of highly trained engineers, the number of such people actually working as engineers is much smaller. This is an example of wasted resources or wrong allocation of resources hampering economic growth.
India’s economy has slowed down so much that it is causing all round concern. According to Dr.Arvind Subramaniam, former Chief Economic Advisor to the Government of India, the growth rate is not 6% as the government claims but is 2.5 percentage points less.
While this is causing worry, Banerjee and Dulfo advice against getting obsessed with GDP growth rates. These rates change for no perceptible reason or for reasons beyond the government’s control they say. What one should be concerned about is that growth or decline does not adversely affect the common, poor, man.
“One very real danger is that in trying to hold on to fast growth, countries facing sharply slowing growth will veer towards policies that hurt the poor now in the name of future growth. In a bid to preserve growth, many countries have interpreted the prescription to be business friendly as a license to enact all kinds of anti-poor, pro-rich policies ,such as tax cuts for the rich and bail outs for corporations,” Banerjee and Duflo say.
They point out to experience from the era of Ronald Reagan in the US and Margaret Thatcher in the UK, to say that pampering the rich and asking the poor to tighten their belts for the sake of future prosperity neither boosts the economy nor helps the poor through a “trickle down” effect. Such measures have only made the rich richer and the poor poorer, they assert.
Banerjee and Dulfo point out that between 1980 and 2016, the rich became richer in the developed countries capturing 27% of the total growth. During that period, the developing world saw the rise of a class of super-rich. The political consequence of this has been the rise of undemocratic leaders like Trump, who exploit real and imagined miseries of the common man to come to power. Real misery stems economic deprivation (inability to get jobs and pay utility bills etc.,) and the imaged misery stems from the alleged role of minorities and immigrants in creating economic misery. Anti-minority, anti- Black and anti- immigrant feelings rise and are fanned by unscrupulous power hungry politicians. Finally, the whole country, including its economy, gets destabilized when social harmony is shattered.
According to the Nobel Laureates, the IMF has now realized that sacrificing the poor to promote growth is bad policy. “It now requires its country teams to take inequality into consideration when giving advice.”
Banerjee and Duflo go on to say that “what policy makers need to remember is that GDP is a means to an end and not an end in itself.” A higher GDP could mean a better life for all, but this is cannot be presumed or taken for granted. There should be a conscious use of GDP growth to increase social welfare and carry out equitable distribution of the benefits of growth. The ultimate goal should remain improving the quality of life of all, particularly the poor.
Banerjee and Duflo go on to say that a better quality of life does not just mean a higher degree and quality of consumption of material goods. “Most human beings, even the very poor, want more than that. They want to feel worthy and respected, keep their parents healthy ,educate their children , have their voices heard, and follow their dreams.”
“ A higher GDP may help the poor achieve many of those things , but it is only one way of doing so, and it is not always the best one. In fact, the quality of life varies enormously between countries with similar income levels. For example, Sri Lanka has more or less the same GDP per capita as Guatemala, but it has far lower maternal, infant and child mortality rates.”
“Such disparities should not be so surprising. Looking back, it is clear that many of the important successes of the last few decades were the result not of economic growth but of a direct focus on improving particular outcomes, even in countries that were and have remained very poor.”
“Credit for this goes mostly to the policy makers’ focus on newborn care, vaccination and malaria prevention,” Banerjee and Duflo say.
They conclude by saying that “ in the absence of a magic potion for development, the best way to profoundly transform millions of lives is not to try in vain to boost growth. The best way is to focus squarely on the things that growth is supposed to improve: the well-being of the poor.”
(The featured image at the op shows a free health clinic for the poor in Bangladesh)