Growing Risks

WHY is growth important? According to conventional economic wisdom, although high growth may lead to social welfare problems, it remains the surest remedy for poverty. Classical economists Adam Smith and David Ricardo said growth would come with an open trading system, and a stable legal framework, and engineered by division of labour, capital accumulation and technological progress, but would slow over time as the returns on capital progressively diminish. The neo-classical theories (in the '50s) of Robert Solow and Trevor Swan established a strong positive correlation between growth and the factors of production—capital and labour. To sustain growth and slow down diminishing returns, they suggested continuous technological progress. This implied poorer countries grow faster, since they start with less capital, and returns should be higher with each infusion.

In practice, however, poorer countries have tended to grow more slowly than rich ones. Also, growth has fostered inequality. Simon Kuznets argued that in the early stages of economic takeoff, growth raised inequality but the gap bridged subsequently. This argument was used for long to argue against the desirability of high growth. In the past three decades, some of the poorer countries—the East Asian tigers, notably—have registered very high growth rates, even as overall global growth has slowed. This has triggered fresh looks at growth, based on experience and data.M

Of the new empirical school, Paul Romer argued that growth wouldn't slow if infusion of capital included human capital or technological innovations. Robert Barro said that provided factors like population growth, level of human capital, and government policies were held firm, poorer countries would actually grow faster. Jeffrey Sachs and Andrew Warner found that economies pursuing trade liberalisation and property rights protection grew better. The East Asian tigers had all these: well-educated workforce, liberalised trade, low government spending and sensible investment promotion polcies. Most have found a rationale for a judicious role of the government in promoting growth.

Also, modern thinking has had to balance equality and growth, leading some economists to conclude that poor countries grow badly not because they're lacking in vital resources, but because they squander or fail to use optimally whatever they had. Secondly, equality actually promotes growth. Poor countries with unequal distribution of assets—especially land—are found to lag behind in equitable growth. India's experience supports both these findings.

But overall, the neoclassical model seems to hold strong. As rich countries past their prime, stagnate and explore growth amidst high insecurity and risk, the curtain of growth seems set to rise on the poorer countries in Asia, South America and Africa.