Between 1980 and 2016, the average income of the bottom 50 percent of earners world-wide nearly doubled, as this group captured 12 percent of the growth in global GDP. The number of those living on less than $1.90 a day—the World Bank’s threshold for “extreme poverty”—has dropped by more than half since 1990, from nearly two billion to around 700 million. According to Abhijit V. Banerjee and Esther Duflo (How Poverty Ends— The Many Paths to Progress—and Why They Might Not Continue; published in Foreign Affairs Jan/Feb 2020 edition) never before in human history have so many people been lifted out of poverty so quickly.
“There have also been massive improvements in quality of life, even for those who remain poor. Since 1990, the global maternal mortality rate has been cut in half. So has the infant mortality rate, saving the lives of more than 100 million children. Today, except in those places experiencing major social disruption, nearly all children, boys and girls alike, have access to primary education. Even deaths from HIV/AIDS, an epidemic that once seemed hopeless, peaked soon after the turn of the millennium and have been declining ever since.” In the opinion of Banerjee and Duflo a great deal of the credit for these gains can go to economic growth. In addition to increasing people’s income, steadily expanding GDPs have allowed governments (and others) to spend more on schools, hospitals, medicines, and income transfers to the poor.
Much of the decline in poverty happened in two large economies that have grown particularly fast, China and India.
So, what most developing countries want to know is not whether they should nationalise all private industry overnight but whether they should emulate China’s economic model. Although China is very much a market economy, the country’s approach to capitalism differs greatly from the classic Anglo-Saxon model, characterised by low taxes and few regulations, and even from its European variant, with a greater role for the state. In China, the state, at both the national and local levels, plays an outsize role in the allocation of land, capital, and even labor. Other economies in East Asia have also deviated from the traditional capitalist model and experienced decades of high growth; consider Japan, South Korea, and Taiwan, all places where the government initially pursued an active industrial policy.
All these economies achieved spectacular success after pursuing unconventional policies. The question is whether they did so because of their choices or in spite of them. Misallocation, in the opinion of Banerjee and Duflo, saps growth, which means that reallocation can improve it. In recent years, economists have tried to quantify just how much growth could come from moving resources to their best uses. Chang-Tai Hsieh and Peter Klenow, for example, found that merely reallocating factors within certain industries, while holding capital and labor constant, could increase productivity in China by 30–50 percent and in India by 40–60 percent. If reallocation took place across a broader swath of the economy, the payoff would be even larger.
In other words, it is possible to spur growth just by reallocating existing resources to more appropriate uses. If a country starts off with its resources very poorly used, as did China before Deng or India in its days of extreme dirigisme, then the first benefits of reform may come from simply harnessing so many poorly used resources. There are many ways to improve allocation, from the moves away from collectivised agriculture that China made under Deng to the efforts India made in the 1990s to speed the resolution of debt disputes and thus make credit markets more efficient.
In the opinion of the authors, one very real danger is that in trying to hold on to fast growth, countries facing sharply slowing growth will veer toward policies that hurt the poor now in the name of future growth. In a bid to preserve growth, many countries have interpreted the prescription to be business friendly as a license to enact all kinds of anti-poor, pro-rich policies, such as tax cuts for the rich and bailouts for corporations.
Such was the thinking in the United States under President Ronald Reagan and in the United Kingdom under Prime Minister Margaret Thatcher. If the experience of those two countries is any guide, however, asking the poor to tighten their belts in the hope that giveaways to the rich will eventually trickle down does nothing for growth and even less for the poor: in both, growth hardly picked up at all, but inequality skyrocketed. Globally, the one group that did even better than the poorest 50 percent between 1980 and 2016 was the top one percent—the rich in the already rich countries, plus an increasing number of superrich in the developing world—who captured an astounding 27 percent of total growth during that time. The 49 percent of people below them, which includes almost everybody in the United States and Europe, lost out, and their incomes stagnated throughout that period.
“The bottom line is that the true ingredients of persistent economic growth remain mysterious. But there is much that can be done to get rid of the most egregious sources of waste in poor countries’ economies and of suffering among their people. Children who die of preventable diseases, schools where teachers do not show up, court systems that take forever to adjudicate cases—all no doubt undercut productivity and make life miserable. Fixes to such problems may not propel countries to permanently faster growth, but they could dramatically improve the welfare of their citizens.
“Moreover, although no one knows when the growth locomotive will start in a given country, if and when it does, the poor will be more likely to hop on the train if they are in decent health, can read and write, and can think beyond their immediate circumstances. It may not be an accident that many of the winners of globalisation have been communist countries that invested heavily in the human capital of their populations for ideological reasons (such as China and Vietnam) or places that pursued similar policies because they were threatened by communism (such as South Korea and Taiwan).” In rich and poor countries pursuing free market economy, elites promised that neoliberal policies would lead to faster economic growth, and that the benefits would trickle down so that everyone, including the poorest, would be better off. To get there, though, workers would have to accept lower wages, and all citizens would have to accept cutbacks in important government programs.
The elites claimed that their promises were based on scientific economic models and “evidence-based research.” Well, after 40 years, the numbers are in: growth has slowed, and the fruits of that growth went overwhelmingly to a very few at the top. As wages stagnated and the stock market soared, income and wealth flowed up, rather than trickling down. The best bet, therefore, for a developing country such as Pakistan is to attempt to raise living standards with the resources it already has: investing in education and health care, improving the functioning of the courts and banks, and building better roads and more livable cities. The same logic holds for policymakers in rich countries, who should invest directly in raising living standards in poorer countries. In the absence of a magic potion for development, the best way to profoundly transform millions of lives is not to try in vain to boost growth. It is to focus squarely on the thing that growth is supposed to improve: the well-being of the poor.
— The writer is veteran journalist and a former editor based in Islamabad.