10 February 2014

The Quality of Economic Growth is Not Strained: It is Twice Blessed

The quality of mercy is not strained; 
It droppeth as the gentle rain from heaven 
Upon the place beneath. It is twice blest;
It blesseth him that gives and him that takes. 

These lines from Portia in Shakespeare's Merchant of Venice were one of the first bits of text I had to memorise in my English literature class when I was 11. It strikes me as a useful way of thinking about the quality of growth. 

The way that economic growth is conceptualised and measured has always been the topic of great debate. How can distributional considerations be incorporated?  How can environmental externalities be taken into account? And, ultimately, how can we improve the ability of economic growth to drive the development outcomes we most care about?  Many now talk about the end of growth—about how it is no longer needed or useful.  I prefer to frame the debate not as the end of growth, but as the end of growth as we know it. The 20th century definition of growth must be left in the 20th century and 21st century formulations adopted for the times we live in.  

The trends and events of the last decade have moved these debates from largely academic exercises to urgent matters of public policy. The dramatic increases forecast in greenhouse gas emissions, the persistence of the poverty of people despite the increasing wealth of nations, and an increasing recognition of the interplay between different types of growth and different types of fragility have made the search for new ways of framing, measuring, analysing and assessing economic growth even more pressing. If not all forms of growth are equally valuable and some are destructive, what growth do we need and how do we get it? 

Our thinking about the quality of growth must not be (con)strained. 

Last week I was in Paris for a workshop set up to develop a series of papers to look into these issues. The project on the Quality of Growth is convened by IDS together with the development agencies of France (AfD) and Japan (JICA's Research Institute). I cannot share the papers yet as they are still works in progress, but some interesting findings are emerging:

  • Different conceptualisations of growth, when measured, deliver very different assessments of country performance over time, and between countries. When using the new Inclusive Wealth Index (IWI) from the UN, China is still the best relative performer over the past 15 years, but the Anglo Saxon countries do much less well than European countries. Countries that are extracting resources in the absence of strong governance actually show negative growth in these new indicators, despite positive GDP per capita growth.
  • 20th century conceptions of growth do not deliver on the issues we care about in the 21st century.  Even the most reliable refuge of those who protect current definitions of economic growth – its ability drive down extreme income poverty-- will soon offer no protection. One of the papers shows that even under the most optimistic of scenarios there will be a slowdown in the ability of growth to reduce $1.25 a day poverty (contrary to a number of papers including one by Martin Ravallion). If poverty rates are continue declining at historical rates, each of the countries of sub-Saharan Africa will have to growth at 4.5% per capita for the next 15 years. In the past 10 years, they have—on average—achieved 2.5%, an excellent performance, but not good enough for the next 15 years if we want to continue to drive down extreme poverty at current (rapid, China-driven) rates.
  • Even historically good performance of growth in driving down poverty has bypassed the most vulnerable members of society. One paper found that in Cambodia, despite excellent macroeconomic performance between 2004 and 2010 and extremely rapid declines in income poverty rates, households with certain attributes (primarily agrarian, who own little or no land) remain stuck in poverty. In another example, one paper using Nepal data compares the responsiveness of human development outcomes to income growth between individuals with and without disabilities. The paper makes it clear that income growth delivers less for individuals with disabilities.
  • One paper made it clear that without low carbon growth in the low income countries global emission targets will not be met, causing problems for all countries. The paper argues that it is in the interests of low income countries—and everyone else--to avoid the “grow now, go green later” strategy. This, the paper stresses, is the key rationale for rich country investment in low carbon growth in the poorest countries.
  • Two of the papers explicitly focus on policy choices, using case studies from a range of countries in the oil and gas, auto, salmon, agriculture and garment industries. As they make clear, there is no single path towards high quality growth. There are many policy choices and many common ingredients, but the heterogeneity of context is great and sequencing matters enormously. The papers argue that single policy instruments should not be relied upon to move forward multiple dimensions of growth quality.  A range of instruments should be employed to advance a range of growth attributes. Trade-offs are inevitable and generate winners and losers, at least in terms of short run perceptions. This means that politics come into play—at the global, national and subnational levels. 
It is important not to underestimate the challenge of thinking differently about growth. For 80 years since the creation of national accounts, massive investments have been made in consolidating and refining that system.  The creaking nature of the national accounts infrastructure—and how we measure household income--has only become widely apparent in the past 10 years. It will take more evidence, more persuasion, and perhaps more shocks for this agenda to accelerate more rapidly. The collection is due to come out in the final quarter of the year and I hope it contributes in some small way to that much needed acceleration.  

A  greater focus on the quality of growth will lead us to a world where we are "twice blessed" by growth:  for what it can do for our individual well being in the near term and what it can also do for us as a community of individuals to safeguard our medium term. 

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