Ferraris for all

I will be debating Ha-Joon Chang of Cambridge University, Paul Mason of BBC Newsnight and Martin Wolf of the Financial Times in a session on the pros and cons of economic dynamism on 1 November. It is part of the Battle for Prosperity strand at this year’s Battle of Ideas festival in London.

Labels: development, economics, growth, speeches

I have finally managed to find a publisher for my book on growth scepticism! I tried three other publishers before I found my present one but each of them backed away when they realised the full implications of my argument. The experience reinforced my view that an uncompromising defence of prosperity is both necessary and likely to prove unpopular in some quarters.

Labels: book, growth

The following comment by me - written during the opening ceremony for the Olympic games - appeared in this week’s Fund Strategy.

The Beijing Olympics symbolises the most important and positive development in the world in decades: the rapid economic development of China. Those who whine so noisily about the Olympics and China reveal more about their own insecurities than about the Asian giant.

China’s rapid growth over the past 30 years has raised more people out of poverty than any other development in world history. Its population is benefiting enormously from rising prosperity in a country where the scourge of famine was until recently a frequent occurrence. It is true that inequalities within China are widening, but in absolute terms living standards are immensely higher than in the past. China’s rapid growth has also led to a welcome reduction in the inequality gap between the developed world and emerging economies.

Given that China’s population is 1.3 billion, a fifth of the world’s, its internal development is hugely important. But it has also brought immense benefits to the rest of us. The global economy would have grown far more slowly in recent years if it were not for China’s contribution. Its rapid growth has played a key role in keeping the world economy going in the midst of an economic slowdown in the West.

If China’s development is so positive, why does it elicit so many complaints? It is hard to escape the conclusion that the West feels threatened by China’s emergence. Although China’s growth strategy is pragmatic, the western countries are worried they could lose their privileged place in the world.

The nauseating double standards applied to China confirm the point that the criticism is driven by western anxieties. No doubt the Chinese regime is deeply autocratic, but many critics forget, or at least downplay, anti-democratic trends at home. Try drawing breath in any British city without being filmed by CCTV cameras. Or how about detaining suspects for 42 days without charge? Those who complain about Tibet seem to forget about British troops in Afghanistan and Iraq. Defenders of such measures might point to the threat of terrorism and crime, but Beijing could do the same.

Rather than carp about the Olympics and China, it is time to enjoy the spectacle of the greatest sporting event on Earth.

Labels: china, development, Fund Strategy, growth

I am struggling to find a term to describe the angst-ridden mindset of even the most pro-capitalist economists nowadays (see 1 August post). Cheerless cheerleaders? Demand depressives? Moody mentalists? None of these quite captures it. Any ideas please email me.

In the meantime here is a contribution from Willem Buiter, a professor at the London School of Economics and former member of the Bank of England’s monetary policy committee, from today’s Financial Times:

“Once the cyclical correction in emerging markets has run its course, I expect growth in those countries to resume at rates that are high but no longer stratospheric. The reason is the environmental constraints on growth in these markets. I am not referring to the (massive) contribution of China and others to global warming, but to the local and regional environmental fall-out from unsustainable industrial and agricultural development: increasing scarcity and rising costs of clean fresh water, clean air and soil that is fit for humans. When the last athlete hobbles out of the polluted Olympic Games of Beijing, black-lunged and gasping for oxygen, there is likely to be a reassessment of what is sustainable growth in China. Even totalitarian regimes require, if not the consent, at least the acquiescence of the populace. Double-digit rates of growth are a thing of the past.”

His article concludes:

“So how bad will things get? After the slowdown/recession has corrected the excesses of the past decade, prospects for the overdeveloped part of the world are quite reasonable, as long as material aspirations moderate in line with modest prospects for sustained growth in standards of living. For emerging and developing countries at the right end of the commodity boom, the potential for prosperity is there, as long as the resource curse is avoided. For poorer countries at the wrong end of the commodity boom, the combination of the terms-of-trade shock and acute environmental challenge will make life very difficult.”

I was particularly struck by the reference to the "overdeveloped" parts of the world.

Pass the prozac!

Labels: consumption, economics, environment, growth, water

Harvard’s Dani Rodrik makes the correct point that even staunch defenders of globalisation are becoming nervous about its benefits. Writing for Project Syndicate (reproduced in Britain’s Guardian newspaper) he argues that:

“we have Paul Samuelson, the author of the postwar era's landmark economics textbook, reminding his fellow economists that China's gains in globalisation may well come at the expense of the US; Paul Krugman, today's foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; Alan Blinder, a former US Federal Reserve vice-chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labour force; Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, writing of his disappointment with how financial globalisation has turned out; and Larry Summers, the US Treasury chief and the Clinton administration's "Mr Globalisation," musing about the dangers of a race to the bottom in national regulations and the need for international labour standards.” (see original article for links).

He could have added Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard, who recently argued in the Financial Times (29 July) that:

“Of course, today’s mess was many years in the making and there is no easy, painless exit strategy. But the need to introduce more banking discipline is yet another reason why the policymakers must refrain from excessively expansionary macroeconomic policy at this juncture and accept the slowdown that must inevitably come at the end of such an incredible boom. For most central banks, this means significantly raising interest rates to combat inflation. For Treasuries, this means maintaining fiscal discipline rather than giving in to the temptation of tax rebates and fuel subsidies.”

As Rodrik argues it is now mainstream economists who pose the most criticisms of globalisation: “The cheerleaders' true sparring partners today are not rock-throwing youths but their fellow intellectuals.”

For Rodrik the key question is to find the appropriate rules for regulating the globalised world. He does not appreciate the dangers that such regulation can bring - particularly if they restrain economic growth.

Labels: economics, globalisation, growth

The following comment by me from Fund Strategy argues it is useful to describe this economic downturn as “mental”.

A senior American politician and economics expert got into trouble recently for saying America was in a “mental recession”. Phil Gramm, vice-chairman of UBS and a former senator, was forced to resign from his position as a top economic adviser to John McCain, the Republican presidential candidate. Barack Obama, McCain’s Democrat rival, had already pilloried Gramm saying – in a reference to a prominent TV talk show therapist – “America already has one Dr Phil”. Despite the hostile reaction, the idea of this being a “mental recession” is a useful one. Both in America and Britain this economic downturn is substantially different from the typical recession. This should be clear from an examination of the magnitude of the slowdown and its character.

In terms of the numbers, it would be easy to assume from the gloomy discussion that the economy is already contracting. But, at least so far, that is not the case. For example, the latest British GDP figures show the economy expanded by 0.2% in the second quarter. It is certainly possible that Britain could dip into recession – defined as two consecutive quarters of contracting GDP – next year, but it has not crossed the threshold so far. Nevertheless, the average independent forecast predicts GDP growth of about 1.5% in 2008 and 1.1% in 2009. It may not be as pleasant as more rapid growth, but it is hardly the Great Depression.

The global figures appear even more robust. According to the latest forecasts from the International Monetary Fund, global output should grow by 4.1% in 2008 and 3.9% in 2009. America is forecast to grow by only 1.3% this year and 0.8% next year, while emerging economies will grow far faster.

The figures do not tell the whole story. Not only is the slowdown far more muted than generally assumed, it is also different in character. Traditional recessions have focused on the production side of the economy. Industry has suffered a shakeout and workers have lost their jobs as companies are restructured. This time, the driver of the slowdown seems to be much more on the consumption side. A reining-back on credit and a squeeze on disposable income seem to be key factors.

A more balanced view of the slowdown should help deal with it in a calmer and more rational way. At present, politicians of all shades seem prone to panic.

Labels: consumption, economics, Fund Strategy, growth

Dani Rodrik of Harvard University has written a summary of the new pragmatic development consensus in the Guardian (10 July). He focuses it on the Spence Commission on Growth and Development (on Spence see posts of 24 April 2007, 13 April 2008, 23 May 2008 and 15 June 2008).

Labels: development, economics, growth

A couple of people have asked me what impact I think the current economic slowdown will have on growth scepticism. The assumption behind the question seems to be that economic restraint will somehow make people see the benefits of growth again. In my view the answer is not straightforward but, on balance, the growth sceptics are likely to be strengthened.

It is true that cuts in living standards, or even slow increases in living standards, can generate resentment among those involved. Worrying about the consequences of wealth in the abstract is one thing but adjusting to the reality of lower living standards is another.

But in the current cultural climate it is likely that growth scepticism will be strengthened on balance. For example, striving for growth is likely to be seen as coming into conflict with environmental limits. Or it could also lead to fears of the destabilising consequences of inequality.

Growth scepticism can be seen, at least in part, as a negative and fearful response to the circumstances in which we find ourselves. For example, it was the economic crisis of the early 1970s that played a key role in first popularising the idea of the “limits to growth”.

Labels: consumption, economics, growth

Martin Wolf, the chief economics commentator of the Financial Times, argued in a feature in yesterday’s paper that sustaining economic growth is the century’s big challenge.

The article, which was partly a review of the new book by Jeffrey Sachs and partly a discussion of the recent growth commission report, started by asking:

“Is it possible for the vast mass of humanity to enjoy the living standards of today’s high-income countries? This is, arguably, the biggest question confronting humanity in the 21st century. It is today’s version of the doubts expressed by Thomas Malthus, two centuries ago, about the possibility of enduring rises in living standards. On the answer depends the destiny of our progeny. It will determine whether this will be a world of hope rather than despair and of peace rather than conflict.”

As a free marketeer Wolf says that his inclination is to argue that problems raised by economic development can be resolved. But later on he admits to developing some sympathy with environmentalism:

“it has become evident, at least to me, that the human impact on the planet on which we depend has risen to enormous proportions. We have treated the global commons as if they were free. Self-evidently, they are not.”

Evidently free marketeers cannot be relied upon to give an unequivocal defence of economic growth.

Labels: development, economics, environment, growth, Malthus, progress

A leader in today’s Financial Times includes a useful summary of the just published Growth Report from the Commission on Growth and Development:

“The “Washington Consensus” – stabilise, privatise and liberalise – is dead. Long live the new pragmatism. That is the message of “the growth report” released this week by the commission on growth and development chaired by the Nobel laureate, Michael Spence.

“No single recipe will secure sustained and rapid economic growth in poor countries, it argues. Governments have to choose from a variety of ingredients. Yet only governments can do so. They “are sometimes clumsy and sometimes errant”, but “active, pragmatic governments” are indispensable.

“This pragmatism is one of the two principal contributions of this report. The other is its focus on growth itself. This is not to suggest that growth alone matters. But without it sustained improvements in human welfare are impossible: one cannot redistribute nothing. The report forces us to refocus attention on this overriding goal.”

I suspect the support for growth is more qualified than the comment suggests. However, since most of the commission’s members are developing country policymakers it is likely to be more pro-growth than if it was composed mainly of Westerners.

Labels: development, economics, growth

Tomorrow the Hamilton Project at the Brookings Institution and the Commission on Growth and Development will hold a joint discussion on the role of economic growth in poverty reduction. Participants will include Robert Rubin, Michael Spence, Larry Summers. The Growth Commission includes some useful working papers on its website including one by Ravi Kanbur.

Labels: development, economics, growth

It is sad that New Scientist magazine seems to have swallowed environmentalist prejudices whole. The editorial in the latest issue (5 April) is a defence of The Limits to Growth, a key 1972 report arguing that there are natural limits to economic growth. It describes the report as warning that with growing population and an expanding economy “resources would eventually run out”. In fact the report argued that many key resources would run out within a few years. It proved spectacularly wrong.

The cover story is on “the collapse of civilisation”. It builds on the work of Jared Diamond: best-selling environmentalist author and purveyor of the idea that the agricultural revolution was the worst mistake in human history. The basic argument is that that more complex society becomes the worse things could get if it breaks down.

Perhaps we should all be living in mud huts isolated from the rest of humanity? That way if our neighbours encountered problems we could be immune!

Labels: consumption, economics, environment, growth

Kevin Watkins, now at Oxford University’s global economic governance programme but formerly at the United Nations Development Programme and Oxfam, had a comment in yesterday’s Guardian on the scourge of traffic accidents in developing countries. Sadly he used the opportunity to take a side swipe at economic growth while also implicitly calling for more external intervention into poor countries:

“Why, then, are governments failing to protect their citizens? Partly because the victims lack a political voice. But often traffic death and injury is viewed as the inevitable collateral damage that comes with economic growth.”

Surely the key problem is that such countries do not have the resources to provide adequate safety measures. In that sense it is a problem that comes with insufficient economic growth. No doubt the more affluent such countries become they better able they will be to provide a better infrastructure for their inhabitants.

Labels: development, growth, transport

A substantial feature in Monday’s Wall Street Journal on the new “limits to growth” illustrated, if anything, the limitations of the free market critique of environmentalism. The article - which unfortunately it not freely available on line - started with the correct observation that the Cassandras have always proved wrong on limited resources. But it lacked confidence in the ability of the current generation to increase supply to meet rising demand. Its conclusion:

“Indeed, the true lesson of Thomas Malthus, an English economist who died in 1834, isn't that the world is doomed, but that preservation of human life requires analysis and then tough action. Given the history of England, with its plagues and famines, Malthus had good cause to wonder if society was "condemned to a perpetual oscillation between happiness and misery." That he was able to analyze that "perpetual oscillation" set him and his time apart from England's past. And that capacity to understand and respond meant that the world was less Malthusian thereafter.”

By coincidence the Financial Times today ran a piece by Martin Wolf, its chief economics commentator, lamenting the death of the free market:

“Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Josef Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits.”

Labels: consumption, economics, finance, growth, Malthus

Barbara Ehrenreich makes an unusual analogy when she discusses the American economy in an article on The Nation website (posted 22 January): “With all the talk about how to stimulate it, you'd think that the economy is a giant clitoris.”

Her initial target is the recently announced fiscal stimulus. She makes the fair point that it looks likely to benefit the rich more than the poor. But then she moves on to a broader attack on what she calls “economy fetishism”. She goes on: “If we have learned anything in the last few years, it is that the economy is no longer an effective measure of human well-being. We've seen the economy grow without wage gains; we've seen productivity grow without wage gains. We've even seen unemployment fall without wage gains.”

In her conclusion she argues: “My point is just that our economy--with its dizzying bubbles, wild lending sprees, reckless downsizings and planet-wide hyper-sensitivity--has gotten too far disconnected from ordinary human needs.”

As I have argued before it is a mistake to use the undoubted existence of inequality as an argument against economic growth. If anything there needs to be even more importance attached to the economy and more growth so that everyone can benefit. The problem is not too much emphasis on growth but too little.

Labels: economics, growth, inequality

spiked has published a review by me of John Kenneth Galbraith’s Affluent Society. I argue that the book, which was first published 50 years ago, anticpates many of the key themes of contemporary growth scepticism.

Labels: book, consumption, economics, growth, review, spiked

The main aim of this note is to spell out the correct statistics on India’s economic growth record. A participant in today’s session on India at 60 at the Battle of Ideas conference claimed incorrectly that India enjoyed strong growth in the decades immediately following the second world war. I said I would put the correct statistics on my site so here they are:

1950-1980 – average growth rate 3.75%.

1980-1990 – average growth rate 5.7%.

1990-2000 – average growth rate 6.0%.

2000-2005 – average growth rate 6.9%.

My source for this is a presentation by TN Srinavasan, a professor of economics at Yale, to an International Monetary Fund book forum on December 14, 2006. A PDF is available here (see page 8).

The pattern is confirmed in the recent country report on India from the Organisation for Economic Cooperation and Development. The graph of GDP growth per head here clearly shows that the economy was pretty sluggish from the 1950s to the 1970s.

As it happens there is a serious debate among economists about Indian’s economic growth but it is not about the facts of growth from the 1950s to 1970s. Instead it is about whether India’s growth took off in the 1980s or whether the reforms of the 1990s were truly responsible.

While I am writing I will quickly correct a couple of other misconceptions.

First, while it is true that India’s agricultural sector is important socially it is much less important economically. Although agriculture accounts for 60% of India’s work force it only accounts for 17.5% of its GDP (see the India entry in the CIA World factbook). Therefore even if the output of the agricultural sector grew rapidly it would only have a limited impact on GDP.

Second, it is necessary to be wary of the talk of India’s “middle class” or indeed that of other developing countries too. The problem is that the term is used extremely loosely. It is necessary to be more specific about how the term is being defined before drawing any sweeping conclusions about a rising middle class.

The point of course it not to be against the use of statistics. On the contrary, they are a valuable tool in understanding development. But they need to be used carefully rather than in a cavalier way.

Labels: development, economics, growth, india

The latest Fund Strategy has a comment by me on the current popularity of developing countries among investors.

Everyone seems to be interested in emerging markets. People who a few years ago would not know Bhutan from Bolivia seem ready to invest in exotic places.

It is not hard to explain the growing popularity of emerging markets. Developing economies are growing far more rapidly than those of the West and their stockmarkets are generally performing well.

Moreover the recent bout of market volatility generally affected emerging markets less than those of the west. It should also be remembered that the credit crunch started in America, the world's largest economy and arguably its most developed nation. It is a long way from 1997-8 when the global financial crisis was centred on Asia.

The growing importance of developing economies is underlined in the latest World Economic Outlook from the International Monetary Fund (IMF). It points out that, for the first time ever, China was the largest contributor to global growth in the first half of 2007. America was relegated to second place by the Asian giant. In addition, over half of global growth was accounted for by China, India and Russia combined.

Such changes are transforming the world. What was previously known as the third world is becoming an increasingly substantial part of the global economy. The key developing economies are no longer primarily agricultural producers (although many people still live in the countryside). They are often large manufacturers and many are highly urbanised.

However, it would be wrong to write off the developed world. The bulk of economic activity, and indeed manufacturing, is still located in the West.

Statistics for GDP at purchasing power parity, widely quoted nowadays, exaggerate the importance of developing economies. If GDP is measured at market exchange rates, which is better basis for comparison, the West is still larger.

It is also important to recognise that the recent growth of developing economies is not as autonomous as it seems. It is true, for example, that East Asia is becoming more integrated as a region. There are growing trade and investment links within the area. However, many of its final products end up in the developed world and America in particular. An American slowdown would not be a disaster but it would have a significant effect on developing countries.

Developing economies are becoming an increasingly important part of the world. But it would be premature to downplay the remaining influence of the advanced economies.

Labels: economics, finance, Fund Strategy, growth

A little noticed but key fact in the new World Economic Outlook from the International Monetary Fund (page 1 of chapter one). In the first half of 2007 China made the largest contribution to global growth for the first ever. This is true not only if measured at purchasing power parity but also at market exchange rates.

Labels: china, economics, growth

George Monbiot, Guardian columnist and environmental campaigner, presents himself as breaking a “universal taboo” when he attacks economic growth in his comment in today’s Guardian. To quote his opening paragraph:

“If you are of a sensitive disposition, I advise you to turn the page now. I am about to break the last of the universal taboos. I hope that the recession now being forecast by some economists materialises. I recognise that recession causes hardship. Like everyone I am aware that it would cause some people to lose their jobs and homes. I do not dismiss these impacts or the harm they inflict, though I would argue that they are the avoidable results of an economy designed to maximise growth rather than welfare. What I would like you to recognise is something much less discussed: that, beyond a certain point, hardship is also caused by economic growth.”

Strangely Monbiot does not seem to realise that such views, far from being taboo, are thoroughly mainstream. Indeed he has often expressed them himself before. Perhaps he should monitor this website for numerous references to ideas similar to his.

Labels: economics, growth

There seems to be a surge of interest in economic history. After the works by Jared Diamond and Greg Clark (see 7 August and 10 August posts), and the provisional text on growth by Daron Acemoglu (see 6 October post), another draft work has appeared on the internet. Meir Kohn, professor of economics at Dartmouth College in New Hampshire, has put most of his The Origins of Western Economic Success in PDF format on his homepage.

Labels: book, economics, growth, progress

Daron Acemoglu, a professor of economics at the Massachusetts Institute of Technology, has published a draft version of his massive Introduction to Modern Economic Growth on the internet. The work looks highly technical but it does address three of the core questions in economic development (p25):

• Why are there such large differences in income per capita and worker productivity across countries?

• Why do some countries grow rapidly while others stagnate?

• What sustains economic growth over long periods of time and why did sustained growth start 200 years or so ago?

Labels: book, economics, growth, progress

My comment in the latest issue of Fund Strategy argues that the long-term economic growth of developing countries is far more important than short-term market volatility.

In the midst of the anxiety about a global credit crunch it is worth dwelling on some good news. The gap between the developed countries and the developing world has narrowed significantly thanks to rapid economic growth. In the long term this will prove a far more significant development than the turmoil in the credit markets.

Gross Domestic Product (GDP) per head in the developing countries grew by almost 30% from 2003-2007, according to the Trade and Development Report 2007 from the United Nations Conference on Trade and Development (Unctad). In contrast, growth per head in the developed world grew by 10%.

Thankfully this narrowing of the gap is the result of the developing world growing strongly rather than stagnation in the advanced economies. As has become usual in recent years the economies of China and India look set to be the star performers in 2007. But Africa is forecast to grow by about 6% with Latin America and West Asia growing by about 5%. Fewer than 10 of the 143 developing countries are expected to suffer a fall in GDP per head in real terms.

Despite this narrowing of the gap it is important to recognise the developed world remains far richer than the developed countries. In 1980 the developed countries were 23 times better off than the developed world in terms of income per head. By 2007 this gap had narrowed to 18 times. However, it should also be remembered that East and South Asia have performed substantially better than the rest of the developing world.

The rapid development of the poor world is confirmed by several articles on cities in the latest edition of the quarterly Finance & Development from the International Monetary Fund (IMF). While Latin America is already highly urbanised, Asia and Africa, the world's most populous regions, are urbanising fast. Already about half of the global population lives in cities.

Such urbanisation should be warmly welcomed. Along with industrialisation it is a key part of creating a modern, developed economy.

So rather than fret about a little volatility in global markets look to the longer term. The world economy is growing fast and demand looks set to rise particularly rapidly in the developing world. Things are far from perfect - in particular the developing countries have a long way to go. But there is enormous potential on the horizon.

Labels: cities, Fund Strategy, growth, inequality

The Trade and Development Report 2007 from the United Nations Conference on Trade and Development (Unctad) has useful statistics on economic growth and inequality. For example, to quote one of the accompanying press releases:

“the per capita gross domestic product (GDP) in developing countries increased by almost 30% between 2003 and 2007, compared to 10% for the Group of Seven (G-7) highly industrialized countries. In 2007, six years after the start of the global recovery, fewer than 10 out of 143 developing countries are set to record a fall in real per capita income.”

Later it goes on:

“Despite this broadly favourable trend, the relative gap in living standards between the developed and most developing countries remains huge: in 1980 per capita income was 23 times higher in developed than in developing countries. In 2007 the gap had narrowed to 18 times. However, this reduction was entirely due to rapid growth in East and South Asia. For Africa, Latin America, West Asia and the transition economies, the relative gap in 2007 is wider than it was in 1980.”

Labels: development, economics, growth, inequality

The Library of Economics and Liberty has published a podcast by Paul Romer, one of America’s leading experts economists, on economic growth. The webpage from which it can be downloaded includes lots of useful links including a defence of Thomas Malthus.

Romer is the leading advocate of new growth theory - also called endogenous growth theory - which emphasises such factors as technological change and ideas in the growth process. It is a move away from the focus on physical capital which previously dominated economics.

Labels: America, economics, growth, Malthus

Someone asked me recently to recommend an essay or long article, available on the internet, to illustrate growth scepticism. I found it hard because the genre is fragmented. There is a vast literature of articles on specific topics but relatively little that gives a good overview of the subject. It is a jigsaw composed of numerous tiny pieces.

Eventually I decided on the 1996 United Nations Human Development Report on “Economic Growth and Human Development”. Although the report is ostensibly not anti-growth it warns growth can be: "jobless, voiceless, ruthless, rootless and futureless, and thus detrimental to human development." Its focus is supposedly on the quality of growth rather than being hostile to economic expansion itself. But with support like that growth hardly needs opponents.

Labels: development, economics, growth

Spiked has published an article by me on the displacement of GDP as a measure of human welfare by broader social indicators. I argue that the statistical debate hides a more general anxiety about popular prosperity.

Labels: development, economics, growth, spiked

A paper (PDF) published by the Information Technology & Innovation Forum argues that most Americans have benefited from productivity growth over the past 25 years. Stephen Rose, the paper’s author, concedes that inequality has risen but, through a careful statistical analysis, shows there is still a link between productivity growth and wage growth. Much of the difference between median income growth and productivity growth can be explained by demographic change (for example, falling average household size) and rising benefits.

Much of the research for the paper was originally done for the middle class project at Third Way. Stephen Rose is also writing a book called Number Games on the decline of the middle class and other myths. He has also recently written an interesting article on the income of the average American for the Huffington Post.

Labels: America, growth, inequality

My comment in this week’s Fund Strategy looks at the “growth and responsibility” motto of last week’s G8 summit. It is a classic growth sceptic formulation.

The slogan for last week's G8 summit of world leaders in Germany was "growth and responsibility". The more closely it is examined the stranger it sounds.

Economic growth has benefits that should be obvious. It has allowed humanity to lengthen life expectancy considerably, slash infant mortality, dramatically reduce working hours and correspondingly increase leisure time. It is closely related to improvements in science and technology, which can also enhance our lives. In a world where almost half the population still lives on less than $2 a day the benefits to be gained are massive. Even those in the developed world could benefit from more resources.

The difficult bit is the "responsibility" part. What does it mean? A close examination of the discussion shows that it refers to the acceptance of self-imposed limits on growth. In other words growth might be OK in certain restricted circumstances but it is viewed as essential to accept limits on what can be achieved. The language is truly Orwellian.

The reasons given for the need for limits are typically environmental and social. It is argued that too much growth can damage the environment and that a growth-oriented consumer society makes people miserable. Another contention is that growth leads to inequalities, which themselves cause problems.

None of these arguments is particularly convincing. Typically as the economy becomes more developed the resources become available to improve the environment. For example, a noteworthy news story last week was a report from the Environment Agency that showed toxic pollution in Britain was at its lowest level for a century.

The argument about inequality is similarly misplaced. It may be the case that growth can lead to greater inequality - it often depends how you measure it - but the general trend is for absolute living standards to rise. To the extent there is a problem the solution is to work out how to have even more growth rather than holding back on development.

Perhaps the strangest argument of all is on happiness. It should be clear that there is no necessary link between prosperity and subjective well-being. But the argument for mass affluence is based primarily on its objective benefits rather than the separate question of people's feelings.

The "growth and responsibility" motto should be rejected. Adding caveats to the need for growth is a retrograde step.

Labels: environment, Fund Strategy, growth, happiness, inequality

Last Wednesday (6 June) I want to a Bookshop Barnie featuring Thomas Homer-Dixon, director of the Trudeau Centre for Peace and Conflict Studies at the University of Toronto, on his new book, The Upside of Down. One of his central arguments is that the “growth imperative” is pushing the world towards breakdown. His solution, typically for growth sceptics, is to preach the need for restraint. One of his previous books, The Ingenuity Gap, evidently takes on “ingenuity optimists” such as William Nordhaus and Julian Simon.

Labels: development, growth

I have come across so much on happiness in the last few days that I will have to resort to relaying it in bullet point form:

* Happiness debate in the Financial Times. Martin Wolf, the chief economics commentator of the Financial Times, had a belated review of Richard Layard’s 2005 book on happiness published in Wednesday (“Why progressive taxation is not the route to happiness” 6 June). A particularly interesting point he made was that the attack on happiness can be seen as a challenge to modernity itself. Developments such as improvement in life expectancy, the liberation of women from household drudgery or easier divorce do not increase reported happiness.

Two book hitters in the happiness debate replied to Wolf with letters. Layard says that there are some aspects of modernity that should be ameliorated. He gives levels of trust as an example. Meanwhile, Andrew Oswald, professor of economics at the University of Warwick and well-known happiness advocate, makes the familiar point that reported happiness has not increased over time in the rich countries over the last few decades. He goes on to state: “That graph could usefully be pinned up in every minister’s and president’s office”. Why he thinks it should be such a decisive argument is not clear.

* Debating Andrew Oswald at Debating Matters. Talking of Oswald, I will be debating him at the national final of the Debating Matters competition in London on June 29. We will both be “expert witnesses” debating whether happiness should be a goal of national policy. Later on the same motion will be debated by the high school students who are taking part in the competition. In conjunction with the discussion the Debating Matters team has produced a useful topic guide for the debate. (Last year I debated John Hilary of War on Want on globalisation at the same event).

* Quoted in Financieele Dagblad. Yesterday I was also quoted on the happiness debate in a substantial feature in the leading Dutch financial daily newspaper by Esther van Rijswijk. I am hoping to get it translated.

* Paradox of Prosperity essay republished. My spiked essay on the “paradox of prosperity” is to be republished by the Institute of Chartered Financial Analysts of India. The organisation is publishing a book in its professional reference series which is provisionally entitled: Prosperity Index: Assessing Growth Anew. It is due out in November.

* Happiness expert website. Ruud Veenhoven, one of the world’s leading experts on happiness, has a website: here. Evidently he also argues that a “paradox of prosperity” does not exist.

* Parenting-happiness link. A parenting expert made the point to me yesterday that the debates on happiness and parenting are linked. The likes of Oliver James argue there is a clear link between women not looking after children and the outbreak of “affluenza” in society.

Labels: affluenza, growth, happiness, india, media appearances, modernity, speeches, spiked

The Christian Science Monitor has a review of Bill McKibben’s Deep Economy (Times Books). McKibben is a prolific writer, climate change campaigner (see 2 April 2007 post), active Methodist and leading growth sceptic.

Judging by the summary of his book it contains little that is new. Environmental limits, happiness and inequality are all there. However, it is likely to be an articulate synthesis:

“McKibben's main thesis: ‘Growth is no longer making most people wealthier, but instead is generating inequality and insecurity.’

“Growth ‘is bumping up against physical limits" [peak oil and global warming] so that continuing to expand the economy may be impossible and possibly even dangerous.’

“Then there's this wild card: ‘New research from many quarters has started to show that even when growth does make us wealthier, the greater wealth no longer makes us happier.’"

The review also puts McKibben in the tradition of other American writers who advocate greater communal living and reducing the human impact on the environment including: Hazel Henderson, Lester Brown, Herman Daly, Wendell Berry, Jonathan Rowe, Sarah van Gelder, Duane Elgin, and Vicki Robin. Arguably Henry David Thoreau and even EF Schumacher (although he was a Briton of German origin) belong there too.

Labels: America, book, growth, happiness, inequality

This week’s Fund Strategy included the following comment by me on Will Hutton’s views on China.

Given the widespread view that China is emerging as a great power it is important to examine the contrarian case. In Britain the leading "China pessimist" is probably Will Hutton, an Observer columnist and chief executive of the Work Foundation. His book on China, The Writing on the Wall (Little, Brown), was published in January. Although his argument is flawed it is gives some insight into Chinese development.

At a meeting last week at the Institute of Contemporary Art he said: "My story is that China is a bubble". His main evidence was China's rapidly rising stockmarket. Hutton draw parallels with house price bubbles in Britain and the technology bubble.

However, Hutton's argument was not entirely dependent on the stockmarket. He pointed to China's high savings rate while claiming that total economy productivity was lower than in Mao's time. He also argued that China is a "sub-contractor to the West". No Chinese companies are in the top 100 global brands. China also has a low level of patent applications and widening economic inequality.

Although most of Hutton's facts are probably correct they do not demonstrate what he claims. It may well be true that the stockmarket is in the middle of a gigantic bubble but it does not follow that its real economic growth has not been astonishing. The financial bubble is relatively recent while the rapid economic growth goes back almost three decades.

China's lack of global brands and its low level of patents do not indicate that it is not growing rapidly. The fact that many leading Western companies use Chinese components and manufacturers shows that China has already made enormous strides. Over time it will no doubt develop skills in branding and marketing.

Nor does the widening of inequality show what Hutton says it does. China has had tremendous success in reducing absolute poverty even though relative inequalities have widened. In addition, the widening of inequality does not show China is not undergoing a fundamental transformation. On the contrary, growing income disparities are a symptom of that transition.

Perhaps Hutton's strangest claim is that productivity is lower than in Mao's time. If that is the case it is hard to explain how cheap Chinese goods have proved so popular all over the world.

In addition, most academic studies show Chinese productivity rising sharply. How China Grows (Princeton University Press), a new book by James Riedel, Jing Jin and Jian Gao, quotes several authoritative studies showing rising productivity in China.

Hutton's thesis shows China still has a long way to go in its economic development. But it would be a mistake to underestimate what it has already achieved.

Labels: book, china, economics, Fund Strategy, growth

The debate I took part in on the “Battle for Affluence” at the Battle of Ideas conference on 28 October 2006 can now be viewed on video. It fears me along with Avner Offer of Oxford University, Mark Easton on the BBC, Nicholas Crafts of Warwick University and Jenny Davey of the Sunday Times. More details can be seen at my post of 5 November 2006.

Labels: affluenza, growth, happiness, speeches

Professor TN Srinivasan of Yale has written a sharp rebuttal to Robert Wade on the world economy (see 1 May post) in a letter to the Financial Times. Srinivasan challenges Wade’s contention that only China has enjoyed a sharp reduction in poverty. India too has experienced substantial poverty reduction:

“India's average annual rate of growth of per capita real gross domestic product was around 1.5 per cent in the period 1950-80. In the 1980s, the rate more than doubled to around 3.7 per cent, and then accelerated to 4.1 per cent during the 1990s. It has grown further to 5.3 per cent since then.

“Poverty, estimated as the proportion of the population having consumption below a modest national poverty line (rather than World Bank's poverty lines, which have very weak analytical underpinnings), fluctuated at around 50 per cent during 1950-1978. It declined to 39 per cent in 1987-88, 36 per cent in 1993-94, and to 27.5 per cent in 2004-05. Had the poverty ratio in India remained unchanged at 50 per cent after 1977-78, the number of poor in 2004-05 would have been 547m, more than twice what it was: namely, 238m.”

Labels: Asia, development, economics, growth, india, inequality

The latest World Development Indicators from the World Bank show the enormous benefits of economic growth in poverty reduction. The total number of people living in extreme poverty - defined as less than $1 a day - fell to 985 million in 2004 (the latest available figures) compared with 1.25 billion in 1990. It should also be remembered that the world population has grown substantially during that time so, in relative terms, the drop was even sharper.

The number of people living below the $2 a day threshold is also falling. However, at 2.6 billion people it still accounts for almost half the population of the developing world.

Two related factors seem to be behind the drop in extreme poverty. First, the rapid rate of growth in developing countries overall in recent years. On average the rate of GDP growth per head has average 3.9% a year since 2000. Second, the spectacular growth of East Asia and China in particular.

Interestingly the World Bank seems keen to emphasise that other factors besides economic growth also play a role in poverty reduction. However, part of this discussion seems to be on relative inequality - a different although related question - rather than absolute living standards.

Labels: Asia, china, development, economics, growth, inequality

The following is a comment by me from the 9 April issue of Fund Strategy.

The past few days have seen mixed news on the world economy. The bad news emanates from America while good news originates in emerging markets.

Probably the worst news is America's decision to impose tariffs on imports of "coated free sheet paper" from China. The Commerce Department has deemed that China is providing unfair subsidies to this industry. Therefore, so the argument goes, America needs to take action to level the playing field between the two sides.

Clearly America's move is symbolic. It is concerned about China's huge trade surplus with the US. The tariffs on paper are therefore designed to encourage China to curb its exports to the US or buy more American goods.

Some might argue America's recently announced free trade agreement with South Korea to an extent offsets its protectionist measures against China. But this is the wrong way to look at the move. The bilateral deal with Korea, giving it preferential access to the American market, is another form of protectionism. America rewards some countries and penalises others as part of a concerted trade policy.

It would be far better if America lived up to its rhetoric of free trade. In principle trading relations between different countries have the potential to benefit all parties in the relationship. Living standards can rise as each country focuses on what it can produce most efficiently.

In contrast, protectionism threatens to fracture the world economy. It could lead to a situation in which there is less trade, not more. As a result everyone, particularly the poorer countries, could suffer.

Fortunately some good news has offset the bad. Figures from the Asian Development Bank, in its annual Asian Development Outlook, forecasts GDP growth in developing Asian at 7.6% in 2007 and 7.7% in 2008. The two demographic giants of the region, China and India, together account for much of this growth.

Even better news is the expansion of the African economies. The continent looks set to grow by 5.8% in 2007 after its 5.7% in 2006, according to the United Nations' Economic Report on Africa 2007. It is growing from a meagre base but the trajectory is hopeful. The main worrying sign is its continuing dependence on primary commodity exports.

If only America, and the West in general, allows the emerging economies to continue to grow then everyone could benefit.

Labels: development, economics, Fund Strategy, growth, trade

Advance leaks of the International Monetary Fund (IMF) forecasts for global economic growth in 2007 and 2007 look positive. A report from Reuters says growth looks set to be 4.9% in both years after a 5.3% rise last year. A slight dip but it still leaves the world economy enjoying its strongest run since the early 1970s. The official forecasts, along with many more details, should be published next week.

Labels: development, economics, growth, progress

Looking again at the material from the recent World Economic Forum the references to the Limits to Growth report are interesting. The 1972 report from the Club of Rome advocated zero economic growth and predicted dire consequences as a result of humanity’s increasing use of resources. In contrast, at the opening address at Davos the German chancellor, Angela Merkel, rejected the zero growth approach. Instead she favoured what she called an intelligent combination of economy and ecology. This is in line with Germany’s motto of “growth and responsibility” for its presidency of the G8.

There was also a session at Davos specifically on “the next limits to growth”. It evidently started positively by attacking what one of the panellists called “doomsayers”. But the apparently positive start was qualified by fears such as an alleged water shortage and the supposed dangers of population growth.

Both sets of sessions seem to include classic growth sceptic formulations. They say growth is a good thing to begin with then add numerous caveats.

Labels: growth

There follows a news analysis by me from today's issue of Fund Strategy. It starts to examine, in a schematic way, the particular character of the current period of strong global economic growth.

It has become commonplace to assert that for the past four years the world economy has grown at its fastest rate since the 1970s. While this is true, its implications are often left unclear. Strong economic growth is usually taken to mean that equities will do well, but there is far more to the story than straightforward stockmarket performance.

To understand the dynamic of the contemporary world economy, it is necessary to look beyond growth rates alone. The character of the growth is as important as its speed.

Nor is it good enough to simply say that the world has become more globalised. It is true that the world economy has become steadily more integrated in recent years, with trade and cross-border investment growing faster than GDP. But globalisation is only part of the story.

There are at least three key factors distinguishing growth in recent years from earlier periods: economic volatility is lower; developing countries are playing a larger role; and the end of the Cold War has changed the political context. All of these factors are important, although the last is probably the most critical, and the least understood.

Anyone wanting to understand the significance of long-term economic shifts is fortunate that a huge amount of data is now available to put them into context. In particular Angus Maddison, widely acknowledged as one of the world's leading experts on long-term growth, has produced invaluable long-term statistics (for link see bar on the left).

From studies by Maddison and others, the long-term patterns are clear. The global economy was virtually static until 1800, when it started to grow rapidly. During the 19th and early 20th centuries, the general pattern of growth was strong. Then in the period from 1913-1950 - a time that encompassed two world wars and the great depression of the 1930s - there was a relative slowdown in growth. Of course there were important variations between different countries and in different years. But it is best to start by examining the world economy in aggregate before drilling down to more detailed studies.

It is the post-war boom, from 1950-1973, that provides the immediate backdrop to the contemporary discussion. During that time the world economy grew faster than in any period before or since. If there ever was a golden age of economic advancement, this was it. The prolonged growth spurt ended during the "stagflation" of the mid-1970s. A painful combination of economic stagnation and high inflation seemed to have brought the good times to an end.

The current discussion of the best growth spurt since the 1970s is an implicit contrast to the post-war boom. To anyone familiar with economic history, the implication that this is the best period of growth since the years that followed the Second World War is clear. What is being said is that we have virtually returned to a golden era of economic growth.

It is certainly true that growth is strong and that a rapidly expanding economy should be welcomed. The more rapidly the economy grows, the greater the ability of human beings to live more prosperous lives. But the differences between the post-war period and more recent growth are at least as important as the similarities.

Perhaps the most obvious is that it is now the developing world that is growing much more rapidly than the developed world (see graph). East Asia in particular, with China at its centre, is emerging as the new workshop of the world. In contrast, during the post-war boom the focus of growth was on the developed world. Japan and West Germany in particular enjoyed rapid growth as their economies recovered from the ravages of the Second World War.

Also fairly widely recognised, at least by economists, is the muting of the business cycle over the past two decades. Or, to put it in different terms, economic volatility has fallen sharply. Economic growth is no longer punctuated by periods of restructuring, with firms going bust and unemployment rising. Although the cycle still exists, it has become a far gentler affair than in the past. Ben Bernanke, governor of America's Federal Reserve, has referred to this process as "the great moderation".

The backdrop to these changes is the end of the Cold War in the 1980s. This had enormous implications for both domestic politics and international relations. There were various ways in which the demise of the Soviet Union had a global impact, but the most important is the demise of the socialist model. It suddenly seemed there was no viable alternative to the market as a form of economic organisation.

In international relations, one of the effects of this was to allow the opening up of much of the developing world, such as China and India, to the global economy. During the Cold War their participation was relatively marginal. But the demise of the Soviet Union meant that socialist states such as China were keener to open themselves up to the market. Even India, while never formally aligned to the Eastern bloc, had a relatively closed economy until the 1980s.

In the domestic sphere the end of the Cold War meant the demise of organised labour. Although trade unions still exist, they are not the force they once were. Their concerns are typically focused on such issues as pensions and financial services rather than militant battles with employers. This changing relationship with unions has given employers more flexibility to restructure their businesses without having to worry about any opposition from unions.

It is this final factor, the end of the Cold War, that probably more than any other explains how growth has become stronger and less volatile in recent years. It also accounts for the closer integration of the developing world into the global economy.

However, it would be a mistake to assume that everything will be straightforward from here on. Although there are undoubtedly new opportunities ahead, there will also be new challenges to face.

Labels: economics, Fund Strategy, growth

In Wednesday’s University of Westminster seminar on Amartya Sen (see 4 January dispatch) I argued that the Nobel prize-winning economist is key growth sceptic thinker. His Development as Freedom redefines development from being a process of social transformation (traditional to modern, rural to urban, agrarian to industrial etc) to a series of individual entitlements. He also uses the term “freedom” to refer to so many different things robs it of any real meaning (for example, removing sources of unfreedom such as poverty, tyranny, poor economic opportunities, systematic social deprivation, neglect of public facilities, intolerance and over-activity of repressive states).

Labels: development, economics, growth, speeches

Will Wilkinson, a policy analyst at the Cato Institute in Washington DC and author of the Happiness & Public Policy blog (see link on the left), has an article in the October issue of Prospect (the start of the article is available here ). In it he argues that GDP per head does have a significant impact on happiness over time. He also cites the argument by Benjamin Friedman, a professor of economics at Harvard, that economic growth may be necessary to maintain happiness at a reasonable level (see review link on the left).

To me such arguements are unnecessarily defensive. Economic growth is beneficial whether or not it bolsters happiness. And unhappiness is not necessarily a bad thing – it can be positive if it is an incentive for humans to create a better society.

Labels: growth, happiness

Here is the good news. The world economy is growing at its most rapid rate since the early 1970s. Emerging economies – home to about 5.5 billion of the world’s 6.5 billion population – are growing particularly fast.

The news comes from the International Monetary Fund’s twice-yearly
World Economic Outlook. Sadly it has received little publicity. But the Outlook includes an interactive database which is easy to use and extremely useful.

One publication which has picked up the story is the Economist. Its comment this week makes the point that for the first time the emerging world made up more than half of global output last year (at purchasing power parity, 30% at market exchange rates). The magazine welcomes this development and explores it in more detail in an accompanying survey. Sadly it reaches the conventional conclusion that the world does not have sufficient resources for everyone to adopt current American lifestyles.

Labels: development, economics, growth

Joseph Stiglitz, a Nobel laureate in economics, is one of the high priests of growth scepticism. The former economic adviser to President Bill Clinton and chief economist of the World Bank is also a leading influence on the anti-globalisation “movement”. In today’s Financial Times he argues that economic growth in the developed world may not be beneficial because it could lead to widening inequality:

“Unfettered globalisation actually has the potential to make many people in advanced countries worse off, even if economic growth increases.”

Not an original argument but a powerful one. The counter-argument is the need for even more growth so that everyone can benefit. Inequality should not be used as a justification for restraint on growth.