Rethinking growth

Published Dec 20, 2012 09:04pm

ECONOMIC growth is needed for incomes to grow. It is impossible to argue that the share/size of the pie that each person gets can increase for everyone without the overall pie increasing.

It is not necessary that when the overall pie increases, when we have growth in the economy, everyone’s share in the pie also increases. We have seen many countries go through significant periods of growth with not only increasing inequality and increasing relative deprivation, but also significant proportions of the population becoming more deprived while growth has been there for others. This has to do with distribution patterns.

The analogy used by many commentators of growth being a rising tide that takes every boat up is very misleading. It requires very strong assumptions about distribution that almost never hold. One could argue that growth is needed even if, initially, it benefits some, as eventually the fruits of this growth will trickle down to everyone. But, historically we have seen two patterns: a) this ‘eventually’ might take a long time to materialise, and b) for some people this ‘eventually’ never materialises without substantial work on the distribution side.

Constructing terms like ‘inclusive growth’ and ‘pro-poor growth’ are an admission that growth need not benefit all. Policymakers realised that even in places where growth had been sustained for many years there were significant portions of the population that were being left behind. Hence they had to come up with ‘types’ of growth that would bring these populations in the net. This, according to them, could be done by ‘inclusive growth’ and ‘pro-poor growth’.

The non-inclusiveness of growth is an inherent part of how the growth paradigm of the last two to three decades has been conceived. Since the late 1970s and the early 1980s we have thought of economic policies on the basis of a) individualism and consumer sovereignty, b) markets, and c) a redefined role of the state. All three of these and interactions amongst them have created the growth paradigm that we are facing today.

Our notion of the consumer has become fractured and now indicates individual consumers. We believe that markets are efficient ways of allocating resources and making production decisions. And given all this, we feel the role of the state should not be of redistribution and/or provision. Instead, it should just be to provide ‘a level playing field’ and to ‘set the rules of the game’.

If individual consumers are our only measure, what do we make of collectives like family and community? We have chosen to ignore them and we are paying some of the cost for this where there is a lot of bemoaning the demise of the family and community, among other collectives.

Benjamin Constant, writing in 1819 said that one difference in the concept of ‘liberty’ between the moderns and the ancients was that we conceived of liberty for the individual but the ancients used to conceive of liberty as liberty for the community/collective. We need a balance between the claims of both.

Markets, under stringent conditions that are hardly ever present, can deliver efficiency in allocation. But efficiency is not the same thing as fairness and desirability. Society has to decide how to deal with the fairness issue and relying on the market for that is inadequate. Unlike the one-person one-vote notion of a democracy, markets are based on the idea that whoever has more money will have more weight in the market. The notion of demand, one of the basic concepts in economics, is defined as “desire backed by purchasing power”. If there is stronger demand for luxury cars by the rich compared to demand for baby food by the poor, the markets will deliver luxury cars. Society has to decide whether that is a desirable outcome.

It is the role of the state, the representative of the people and the expression of the collective will/voice to ensure the welfare of the people. But this is exactly what has been ceded over the last three decades. The power of the state has been challenged and reduced. The poor — individuals, families or communities — can get trapped in cycles of increasing poverty and deprivation due to low income/savings, low education/skills, poor health, or a variety of income and other shocks. It is impossible for these people to climb out of such traps without state help. Helping them is not only state responsibility, it makes long-term economic sense as well.

Investments that help the poor in health, education, worker welfare and rights, and infrastructure have all been contested. In many places the state has given way to markets to help the rich at the cost of the poor, while, in the name of growth, subsidies to the rich have continued or have increased. Coming up with a few hundred billion dollars to extend healthcare to a lot of poor was hard in the US, but coming up with hundreds of trillions to bail out the financial sector after its failure due to its own greed was not.

Similarly, in Pakistan, coming up with a couple of hundred billion rupees for income support, health and education is thought to be impossible, but giving subsidies of hundreds of billions of rupees through tax breaks and protection to industries is justified and not at all questioned.

This is not the only way of thinking about growth. But to rethink growth we have to challenge the notions that underlie this paradigm: the sovereign individual as the only important unit, the role of fairness and equity in the economy and the role of the state in the light of overall societal objectives. Activism, whether it is in the form of Occupy Wall Street or on the streets of the Middle East or in protests in South Asia, is already moving us forward. If policymakers are not able to address the issues proactively, these protests and movements will, eventually, though at tragic cost, create new paths.

The writer is senior adviser, Pakistan, at Open Society Foundations, associate professor of economics, LUMS, and a visiting fellow at IDEAS, Lahore.


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Comments (2) Closed




FredS
Dec 21, 2012 01:18pm
He paints either/or choices. Reading Basic Economics by Thomas Sowell would shine a light here, I take exception to this part. "Benjamin Constant, writing in 1819 said that one difference in the concept of
Hassan Bsc 2002
Dec 21, 2012 10:44am
What a gem of a piece of almost lyrical quality. Faisal Bari the artist, whether it is the classroom or newspaper article, at his best. Loved it.