The Hindu Business Line : Whatever happened to economic growth?

While studies of economic growth have become more popular among economists, long-run trends suggest that growth itself seems to have become something of a rarity in the developing world. In this edition of Macroscan, C. P. Chandrasekhar and Jayati Ghosh examine patterns of growth since 1960 in 54 developing countries.

The newest growth industry within the economic profession is the study of economic growth. We now have a spate of academic books and reports of international organisations, exploring “the mystery of growth” and in the process rediscovering basic truths of development economics that have been either forgotten or suppressed for around two decades.

This is quite a change, because there was a period of around two decades, from the mid-1980s onwards, when how to kickstart economic growth was not recognised as a relevant question. The focus was not on growth per se but on stabilisation and “efficiency”. It was taken for granted by mainstream neoclassical economists and the policymakers influenced by them that economic growth would come about on its own, once markets were deregulated and rules for domestic and international trade and investment were liberalised.

In this story, growth was something best left to market determination freed from “the dead hand of the state” and unfettered by government failures, which would make the resulting economic expansion more efficient and dynamic.

Growth re-examined

But the reality of the past two decades has been chastening, as the promised growth did not materialise in many countries that wholeheartedly embraced these principles, and the most dynamic economies turned out to be those with much more flexible and heterodox approaches to economic policy.

As a result, economists have begun, even if very belatedly and without much enthusiasm, to examine once again the basic questions of growth and development that were ignored for so long.

The latest such offering is the Report of the high-profile Commission on Growth and Development, consisting of 21 “world leaders and experts” chaired by Nobel Prize-winning economist Michael Spence (and including inter alia Montek Singh Ahluwahlia from India).

Some of their conclusions are not exactly novel, such as that a high growth trajectory requires high investment rates (at least 25 per cent of GDP, predominantly financed by domestic savings) and preferably should also involve investment of around 5-7 per cent of GDP in infrastructure and spending of 7-8 per cent of GDP on education and health.

But while such conclusions may appear banal or obvious, this Report does provide an opportunity to examine at least briefly the actual patterns of growth in developing countries over a reasonably long period. So it is worth investigating the question, how much economic growth has there actually been in the developing world? To what extent have average incomes increased over the past half century?

Data from the World Bank’s World Development Indicators allow a look at long-run trends in real GDP for a reasonably large sample of developing countries, covering the period 1960 to 2006. The data used here relate to total and per capita GDP in 2000 US$ terms.

The Table presents the results of the relatively simply exercise of comparing real per capita GDP at the end of the period (the average of the three years 2004-06) with the start of the period (the average of 1960-62) for a sample of 54 developing countries, including large and small economies. (Note: the base years are different for the following countries: Gambia 1966-68; Iran 1965-67; Jordan 1975-77; Saudi Arabia 1967-69; Turkey 1967-69.)

The idea is that 46 years is a sufficiently long period to be able to capture at least whether there has been sustained growth in the countries considered. The comparison of end points based on 3-year averages reduces the impact of annual fluctuations.

Also, the period is long enough to judge whether growth episodes have led to sustained improvement or have been followed by slumps in which previous income gains have been eroded.

Startling results

The results are startling in establishing how little real economic growth has actually occurred for most developing economies. The 54 developing countries listed in the Table account for the vast majority of the population in the developing world, and cover large and small countries, natural-resource-based primary producers and semi-industrial diversified economies, countries that have adopted more or less free trade policies all through and those that have gone through phases of import substitution followed by more liberal import regimes. Yet, in this large group, only a handful can be said to have experienced anything like real growth of per capita incomes.

Over 46 years, a reasonable process of economic expansion — say an average of 3 per cent increase per annum — would cause per capita incomes to increase by almost four times. Yet only seven countries in this list meet this very undemanding criterion. And only a small minority of countries in this list show just a doubling of per capita incomes over this long period, which can be said to cover two generations.

What is even more depressing is to note how many countries experienced barely any increase, and how many actually experienced a decline, in per capita incomes over this period of nearly five decades. Twelve countries in this sample experienced stagnation or retrogression of per capita incomes over this period. Because this is such a long period, the stagnation or decline does not reflect a continuous trend, but rather phases of expansion followed by contraction, or vice versa.

So clearly, sustained economic growth cannot be taken for granted. And phases of high growth are cause for celebration only if the income gains are retained over time, rather than lost in subsequent downswings.

Time series analysis

For this reason, it is worth examining the time series data on economic growth in these countries, which will go beyond a comparison of the end points.

Chart 1 shows per capita GDP for each year in this period (in the aggregate rather than in per capita terms) in the ten largest economies of Latin America. The volatility of output in this region emerges only too clearly, with the two richest countries at the start of the period — Argentina and Venezuela — experiencing some of the greatest volatility.

The only three countries for whom it can be said that there has actually been an increase in per capita GDP that has sustained over the period are Mexico, Brazil and Chile. For the first two, the real growth phase was clearly before the early 1980s.

In other words, Brazil and Mexico grew during the period of import substituting industrialisation. Subsequently, per capita incomes have barely increased, showing that these two countries have just about managed to hold on to the income gains achieved earlier, without much further growth.

The only large Latin American country that shows a continuous rise in per capita incomes even after the 1980s is Chile, where the growth story is evident from about 1992 onwards. Chile is often described as a poster boy for neo-liberal economic orthodoxy, but the reality is that it followed quite heterodox policies in several areas, including in capital account management and active state promotion of agro-processing industries.

The story is almost uniformly depressing in terms of per capita incomes in Sub-Saharan Africa, which have been stagnant or increased relatively little and then fell again, for almost all the countries. The two exceptions are South Africa and Botswana. South Africa was the richest (and largest) economy in the region in the early 1960s, and also grew most rapidly — during the apartheid years! This was probably because the external sanctions forced South Africa to undertake its own version of import substituting strategy.

Botswana is the other, and remarkable, outlier, with a dramatic increase in per capita income of more than 17 times over the entire period. But while Botswana is regularly presented as the African success story, its experience is also the classic sobering reminder that economic growth alone need not be enough to deliver better material conditions to most of the population.

Botswana’s growth is based on its diamond resources, which have greatly benefited the elite and created an enclave economy that has also spent on some physical infrastructure that assists resource extraction and caters to the elite.

Its spectacular growth has been accompanied by poverty rates that persist at more than half of the population, falling life expectancy and sharply worsening income distribution. In human development indicators it is among the poorer performers even in sub-Saharan Africa. So the pattern of growth, while striking, is obviously not one worth emulating elsewhere.

Developing Asia is the region that has been the most dynamic in growth terms over the past two decades, and therefore per capita incomes in this region are expected to be rising rapidly, in contrast to Latin America and Africa. However, even in this most dynamic region, sustained growth in per capita income appears to be the exception rather than the rule. Among the 11 countries in the region taken up for analysis, three witnessed significant improvement — Malaysia, Thailand and China. (South Korea was excluded because it began and ended with a much higher per capita income, but its growth has been more moderate.)

While the Chinese growth story is what is most widely talked about, China still remains significantly below the other two in terms of per capita income in the 2000s. Indeed, the most notable experience in this group of countries appears to be that of Thailand, where the very rapid growth of the 1980s led to income gains that were partly destroyed by the Asian financial crisis, but thereafter there was some recovery.

The other region considered is West Asia, mainly because this is a region with a large number of oil-exporting countries, and it is generally believed that such countries have been able to benefit from their oil rents by increasing aggregate incomes. Chart 2 shows that this is actually not the case, and that even in West Asia, hardly any economy has shown a substantial increase in per capita income over the entire period. Kuwait and Iraq have been excluded from this analysis because of the impact of conflict on their economies, but they actually show even worse GDP trends than the other countries of the region.

The largest oil exporter, Saudi Arabia, experienced a substantial decline in per capita GDP from the early 1980s, and had still not recovered from this to reach earlier levels by 2006, despite the recent increase in oil prices. Other countries show stagnation of per capita incomes. Indeed, the only country that actually shows a rise in per capita GDP over the entire period is Libya!

The general conclusion that emerges from this consideration is that sustained growth in the developing world has actually been a rarity, confined to a small handful of countries. Indeed, this is probably the more significant research question — not just why growth occurs, but why, despite adhering to the economic orthodoxies prescribed by donors and others, so many countries in the developing world have not been able to achieve even the relatively moderate increases in per capita income over the past half century.