SHREYAS DESAI
Over the last few decades, economic growth rate has been one of the most crucial policy indicators for general public, the other being the inflation rate. Even today, high growth rates are the first promise of any election campaign.
However, in the face of climate change and other socioeconomic changes, we are now starting to wonder if this growth can go on forever. New opinions are slowly emerging, advocating an expiry date on high growth rates, and growth in itself. It is noteworthy that these views do not have their foundations solely in climate change. Some of them are brave enough to say that climate change may be reversed as a result of slowing growth.
Questioning growth
Vaclav Smil is a Canadian professor who has authored books in various disciplines, and Bill gates admits he has read all of them like a fan. The title of His latest book ‘Growth: from Microorganisms to Megacities’, is shows his multidisciplinary approach. Smil believes the golden mean of growth (in terms of per capita income) was sometime between 1960-1970s, in Europe. We need to go back to that time in terms of material growth and well being, in his opinion. ‘People from Copenhagen would not be able to fly Singapore for a three day visit, but so what?’ He asks. He thinks the rising demands of SUVs and higher material growth is like the trend of smoking, a few years ago. Once people realize its clear link to cancer, it will get restricted on its own.
Comments of 2019 Nobel Prize winners Esther Duflo and Abhijeet Bannerjee are equally insightful.
In an article, they argue that sometimes growth maybe a result of simply starting from a rather dismal point. A seedling towered by buildings from all sides will improve very quickly when shifted to an open garden and watered. China under communism and India under its licence raj faced similar changes. As resources were put to better use, sharp spikes were seen in growth rates. It might have happened even without any special governmental policy. What was termed as “manufacturing miracle” was simply a rapid improvement from a dismal starting point. But as the economies grow, the scope for further improvement either shrinks or becomes tougher to gain. There need not be a common threshold after which all nations will slow down as a rule. India can start slowing down before it reaches GDP or per capita income levels of China or Japan.
However, when that happens, governments will do everything in their capacity to revive the growth “ spending heavily to boost the economy - taking more risky decisions that turn bad as and because going gets tougher. In 1970s, Japan had been growing faster and faster every passing decade. Stalwarts of Economics predicted it would soon overtake US. Such optimism led to the famous 1980s property bubble of Japan, which left the banks heavy with bad loans, inviting crisis in 1990s. Growth ground to a hault. Successive governments announced stimulus packages, in vain hope of reviving GDP “ leaving Japan with high National Debt, triggering a debt crisis of its own. Looking at the sequence of events in Japan, the story of India does not seem much different.
-Rethinking demographic dividend
In his book, ‘Rise and fall of Nations’, Ruchir Sharma dedicates the opening chapter to the relation of population growth and economic growth. For more than 100 years, global population growth rate has accelerated. In 1960, a famous paper said that by 2024, it would be growing at an infinite rate. As absurd as it sounds, that was the exact year since when population growth rates have declined every year. Population continues to grow, but rate of population growth is declining.
In 2005, the European commission warned that “Never in history has there been economic growth without population growth.” Globally today, most of population growth is among people over 50. Since 1960, average number of births per woman has fallen from 4.9 to 2.5 globally. Almost half of the world lives in countries where this rate is below replacement level of 2.1, and populations are expected to shrink. Developing countries like India and china are going to face a fall in population growth rate that will be sharper than developed countries, and they are much less equipped to face it. This will fundamentally change the economic prospects of the planet.
For many nations, the serious problem is not too many people, but too few young people “ burdened with rising production demands from retirees. Taxing the young to pay for pensions of the old can no more be feasible when elders outnumber the young. Arrival of robots into workforce maybe a relief for some countries rather than a threat.
Sharma argues that Demographic dividend can be misinterpreted as the population growth that automatically results in economic growth. It pays off in reality only if pools of talent are developed in the population, at sufficient pace by purposeful government policies. Population growth is a precondition, but never a guarantee for fast growth. The rapid population growth in the Arab world from 1985 resulted in no economic dividend. This caused crippling unemployment in 2010s, ultimately giving way to the Arab Spring. The world is witnessing how the democracies founded during the Arab spring are now crumbling.
-Growth does not mean happiness
Bannerjee and Duflo advise that the lesson to India and China is clear: “growth will inevitably slow. There is a lot that policymakers in both countries can still do to improve the welfare of their citizens. A myopic focus on increasing the rate of GDP growth could squander that chance.” Japan is 23rd richest country in the world, but only 58th happiest. Consistent topper in happiness is Phillippines “ much poorer and often savaged by typhoons. Welfare and equitable income distribution are perhaps more important challenges.
Ruchir Sharma draws attention to how countries are re-inviting retirees, women and immigrants into the working population. Smarter countries are rethinking the relevance of a “retirement age”, an idea that was unknown not so far ago. Number of countries with official aim of increasing populations via immigration is on the rise. While countries like US, Canada and Australia are actively encouraging high skilled immigration, countries like Japan and South Korea which earlier had tightly shut doors, are now forced to rethink and relax their restrictions. For nations like India and China, the battle is about retaining talent that is attracted away by countries like USA.
It seems that after you reach a certain high threshold, sustaining growth is an achievement in itself. Growth can reap more and more returns only up to a limit. History agrees that almost all economic crises have resulted from ideas of unlimited growth: stock market and real estate bubbles, 2008 crises, tulipmania, and many more. Economics is rife with examples of a fictional “closed economy” “ time has come to understand that Planet Earth is in fact the reality of it. No closed economy can survive on its own with unsustainable habits. This is a lesson in common sense that textbooks seem to have forgotten.
