Economic Growth

by padraigcolman

This article appeared in the November 2008 edition of LMD (Lanka Monthly Digest).The strapline was: “To grow or not to grow? Michael O’Leary goes in search of an answer to this conundrum”. I think that what I was trying to get across to a business audience was that I was not a fan of growth but I would like to see established in Sri Lanka some of the measures of good governance that growth proponents recommended.

 

Seventeenth-century Spanish Conquistadors in America destroyed all the settlements in their path and returned from their wanderings to starve, because there was nothing left to loot. Are we, 2lst century conquistadors, destroying our planet in the never- ending quest for economic growth?

 

As long ago as the 1960s, Robert Kennedy warned that GDP “is indifferent to the decency of our factories and the safety of streets alike”. He added: “It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning. Neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”

 

There are four basic arguments against pursuing growth:

 

  • Growth has negative effects on the quality of life. ‘Pleonexia’ means pathological greed that can cause stress, addictions and compulsions, ‘affluenza’ and loss of moral grounding.
  • Artificial needs are created. Zygmunt Bauman wrote that capitalism has made consumers immune to satisfaction. Desire no longer desires satisfaction. ‘Desire desires desire’, which is the basis for our new ‘constant greed’.
  • Growth depletes natural resources and is ultimately unsustainable. If everyone consumed at the US rate, we would require nearly five more planet Earths! According to the Red Cross’s World Disasters Report, the frequency and cost of natural disasters will increase due to a combination of environmental degradation, climate change, urban population growth and economic globalisation.
  • The gap between the richest and poorest is widening. Although there was never enough income at the peak of the pyramid to allow an egalitarian distribution to raise the bottom very high, the magic process of growth would – or so it was thought in the 60s – bring the bottom near to the top during a period of only a generation or two.

 

According to Social Limits to Growth, Fred Hirsch, as a society becomes wealthier and more engaged in a positional contest for consumption, it becomes more difficult – not easier – to arrange for the redistribution of income by government. “The flaw in the affluent society lies not in the false values of affluence, but in its false promise,” Hirsch theorised.

 

Even when Sri Lanka was boasting an official growth rate of 7.5 per cent, this growth was not converted into poverty reduction. The income of the poorest in this country fell from 18.9 per cent of the income of the richest in 1963 to 13.4 per cent in 2002.

 

In the US, the wealth gap is currently at its widest since 1929. ln 1968, the CEO of General Motors (GM) took home 66 times the amount earned by the typical GM worker. In 2005, the CEO of Wal-Mart earned 900 times the pay of his average employee. There are more than 600,000 millionaires in the UK and35 billionaires. More than 2.5 million children – around a quarter of the total – are living below the official poverty line.

 

The Growth Report recently published by The World Bank (WB) is in no doubt that growth is the answer to the world’s problems, particularly poverty in the developing world: “In short, we take the view that growth is a necessary, if not sufficient, condition for broader development, enlarging the scope for individuals to be productive and creative.”

 

Since 1950, 13 economies have grown at an average rate of seven per cent a year or more for 25 years or longer. Nine of them are in Asia: China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Singapore, Taiwan and Thailand. They share common characteristics: engagement with the global economy, macroeconomic stability, high rates of savings and investment, the market allocation of resources, and credible and capable governments.

 

The Growth Report provides a handy checklist of bad ideas:

 

  • Subsidies, except for those targeted at highly vulnerable groups.
  • Dealing with unemployment by creating false state-sector jobs.
  • Cutting infrastructure investment for short-term gains.
  • Providing open-ended protection of specific sectors.
  • Dealing with inflation through price controls.
  • Treating environmental concerns as an unaffordable luxury.
  • Underpaying civil servants, including teachers.
  • Excessive interference in the banking system, which prevents the development of an efficient system of financial intermediation and reduces productivity.

 

Whichever side one takes in the debate about whether the pursuit of growth is good or bad, The Growth Report offers some sound advice about good governance and economic management. It stresses the importance of an effective and accountable civil service free of any taint of corruption: “Government leaders send powerful signals about values and the limits of acceptable behaviour when they decide on how to respond to cases of misbehaviour. Mild responses send the clear signal that while the misbehaviour is not right, it is not all that serious.”

 

According to the WB report: “The historical record shows that growth requires broadly stable prices, a currency that is not debauched by hyperinflation. Growth is about more than economics. It also requires committed, credible and capable governments …The country’s policy-makers must communicate a credible vision of the future and a strategy for getting there. They must be trusted as stewards”.

 

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