Economic growth is not the b-all and end-all in the Third World

February 11, 2020

Do
we know how to end poverty in the Third World? Do we know why some economies
expand and others don’t? Not really. There is no clear formula for growth. The
two Nobel economics prize winners of last year, the husband and wife team of
Abhijit Banerjee and Esther Duflo, write in the current issue of Foreign
Affairs, “The uncomfortable truth is that the economics profession still
doesn’t have a good sense of why some economies expand and others don’t”.

Despite
our ignorance, we have seen poverty in the developing countries cut by half
over the last ten years – from around 2 billion people to around 700,000. China
alone has taken hundreds of millions out of poverty. India has done well too.
Between 1980 and 2016 the average income of the bottom 50% of earners in the
world nearly doubled.

Direct
interventions like building more schools, clinics and hospitals, countering
child mortality and deadly diseases, feeding the hungry when famine or floods
decimate vast areas, spreading the use of vaccinations and contraception, and
preventing malaria have had the most impact.

Over
the long-term economic growth is important if development is to proceed without
foreign aid. Growth does produce more of the wherewithal for government social
and development programs – if a government so decides.

But
we cannot rely just on growth to improve peoples’ lives. China and India have
both had periods of high growth, but now are slowing. Is this inevitable or is
it, as in China, just a maturing of the economy? This export-led economy can’t
grow its exports faster than the world economy is growing.

In
India, after a 30 year period of fast growth, it is the bad economic management
of the government headed by Narendra Modi which refuses to emulate the methods
of the success of its rival predecessor, the government of Manmohan Singh and
Sonia Gandhi, that has led to a sharp fall in the growth rate.

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But
in both China and India this shouldn’t mean that the government should slow
down its social development and life-enhancing programs. Much can be done to
improve society and its well being with reduced growth.

Trying
to work out what makes high growth possible makes little sense, argue Banerjee
and Duflo: “Almost every variable for a given country is partly the
product of something else. Take education, one factor that is positively
correlated with growth. Education is partly a function of the government’s
effectiveness at running and funding schools. A government that is good at
doing that is probably good at other things as well, say, building roads. If
growth is higher in countries with better educational systems, should the
schools that educate the workforce get credit, or the roads that make trade
easier? Or is something else responsible? Further muddying the picture, it is likely
that people feel more committed to educating their children when the economy is
doing well – so perhaps growth causes education, not just the other way round.
Trying to tease out single factors that lead to growth is a fool’s errand. So,
by extension, is coming up with corresponding policy recommendations”.

Even
though we know that there are myriad factors that when combined have made fast
growth possible there simply is no accepted recipe for how to make poor
countries achieve permanently high growth. The World Bank’s commission on
economic growth recognized this.

So
how should we think? National income (GDP) growth is a means to an end, not an
end in itself. Of course, it creates jobs, raises wages and increases budgets
so that the government, if it wants – this depends on its ideology – can
redistribute more.

The ultimate goal should be improving the quality of life. The good news is that even in the absence of fast growth there are ways to improve other indicators of progress.

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As I said at the beginning, this can be best achieved by direct intervention in health and education and the like, as well as improving the performance of banks and courts and getting teachers to turn up for work.

Many poor countries and regions have better indicators of improved life quality than countries with a higher level of income per head – for example, Sri Lanka, Bhutan, Cambodia, Kerala, and West Bengal in India, Barbados, Uruguay and Costa Rica.

Here, and in like countries, the infant mortality rate, to take one example, has fallen sharply, sometimes as fast, sometimes even faster than in better off middle-income countries.

The goal must be to raise living standards with the resources the country already has.

Well-being, not growth, is first and foremost what it’s all about.

Growth is important but well-being, independent of growth, is more important.