A Non-Linear Path to Economic Growth and Prosperity

Economic Diplomacy

The nature of anendogenised/indigenous growth process for any economy warrants being distant from the uniformly defined neo-liberal frameworks on growth accounting

Rivers of ink have been spilled in studying the role of the state as an active economic actor in promoting growth and development in developing economies. States in peripheral countries across Asia, Latin America and Africa have most importantly showcased this by being engaged in varying patterns of state intervention. For growth to be inclusive and sustainable in nature, it is widely accepted that states do need to play an active role in promoting industrial transformation while supplementing equity in terms of distribution of economic resources and income generated.

The role of policies here is, thus, critical in establishing the state to effectively manage the market forces to fruition. Yet, in many cases, we observe states (particularly in developing economies) to be largely ineffective in promoting economic development at a sustainable rate. Cases in point could include cross country narratives from Sub-Saharan Africa (Zimbabwe, South Sudan, Angola, and Benin etc.), and Asia (Bangladesh, Afghanistan, Bhutan, Myanmar, Cambodia etc.). One of the main reasons for this stems from a lacuna in understanding the concept & nature of economic growth that is vital for each of these late developing economies.

The nature of anendogenised/indigenous growth process for any economy warrants being distant from the uniformly defined neo-liberal frameworks on growth accounting. I discuss these frameworks here under the economics of growth while pressing on the need for an expanded relationship, using taxonomy of geography, institutions, integration processes along with the role of the state. Through the knowledge of these factors albeit established through non-linear relationships, I argue, for a better incorporation of local political economy features in the process of achieving economic growth as a means to an end goal of securing development.

What the State is

Quite often in informal discussions and academic discourses, there seem to be no practical distinction made between what constitutes or defines the “state” and the “government”. Where a government can be removed through revolutions and coups, etc., the state with its rights and obligations remains.

In an anatomy of the state, Murray Rothbard defines state through the eyes of some scholars as “an institution of social service; the apotheosis of society; an amiable, though often inefficient, organization for achieving social ends”; but almost all other scholars regard it as “a necessary means for achieving the goals of mankind, a means to be ranged against the ‘private sector’ and often winning in this competition of resources”.

Contrary to Rothbard’s views, the role of the state today, particularly in the case of a late developing or industrialising economy remains critical in promoting the participation of the private sector in sharing the resources while also promoting economic competition for them to achieve maximum returns. To be defining the state only as an “organisation of the political means and as the systematisation of the predatory process over a given territory” would circumscribe its role by excluding the benefits of good, efficient economic policies. In expanding the economics of growth, it is thus, pertinent to involve the “visible hand” i.e. state as an active stakeholder.

The Economics of Growth

To shape our thinking about the economics of growth, it helps to distinguish between the “proximate” and “deep” determinants of growth. The figure below highlights the traditional way in which economists across the globe study growth through elements in determining a higher income which is considered as a sign of increasing economic prosperity. The total produced output in the form of goods and services (as computed by the Gross Domestic Product-GDP) for an economy is shown here as a function of the resource endowments (labor, physical capital, human capital) and the productivity with which these endowments are deployed.

Per capita growth = physical capital deepening + human capital accumulation + productivity growth

In the equation given below, ‘a’ as a constant represents the technical and allocative efficiency level for an economy. This efficiency level reflects the optimum use of the resource endowments across varied economic activities. According to Rodrik, the growth of per capital output further can be expressed in terms of three proximate determinants:

1) Physical capital deepening;

2) Human capital accumulation; and,

3) Productivity growth.

Advancing Rodrik’s analysis on defining proximate determinants of growth with deeper determinants, he uses a threefold taxonomy that significantly adds to the final value of economic growth in an endogenousi or exogenousii way.

As per the threefold taxonomy defined here (figure 2), “Geography relates to the advantages and disadvantages posed by a country’s physical location (latitude, proximity to navigable waters, climate, and so on). Integration relates to the market size, and the benefits (as well as costs) of participation in international trade in goods, services, capital, and possibly labour and institutions refer to the quality of formal and informal socio-political arrangements ranging from the legal system to broader political institutions that play an important role in promoting or hindering economic performanceiii”.

Exogenous

What is missing here though is the mention of the ‘State’ itself in shaping the path to higher growth through effective policies which in turn will best allow the resource or factor endowments (land, labour, capital etc.) to be most effectively used in generating income and producing the maximum production output; Policies, at the same time would also allow the state to equitably distribute the gains from production, trade and foreign investment (received inwards) to the society.

Studying Interrelationships

The arrows indicated in Figure 2, reflect the basic framework with feedback effects, both from the growth back to and among the ‘causal’ factors. The central question in growth economics literature are which of these arrows matter the most for economies and why? Rather, today, it is pertinent to expand how these arrows can work best through the effective intervention of the state. For example, institutions in countries like Chinaiv (since the 1980s) and India (since the 1990s) have been shaped by the state’s ability to understand the changing needs of local politico-economic requirements better which allowed for these rising economies to work on building their own set of institutions.

For economies that are rich in terms of their natural resource endowments (say oil in the Middle East and diamonds in case of African economies like Botswana), the state needs to acknowledge the primacy of geography in affecting higher income determination through trade and investment. While economies like Australia, Mauritius on the other hand offer us narratives on how in-spite of the absence of a rich geography, both these economies through effective state intervention and good quality institutions have grown and developed. Australiav is the only OECD economy that contains large areas of tropical land and where much land is desert, arid with low and highly variable rainfall.

What States Need

Consistency is a minimum requirement of good planning and the skill in it is to identify correctly the constraints that will bind the course of growth while judging the maximum feasible rate of growth that the country concerned can achieve. For the state to guarantee this, sensitivity to local politico-economic conditions and economic facts remains the key. The nature of the solution lies in the nature of the problem itself when it comes to streamlining processes in working towards higher, inclusive economic growth as a precursor to economic development in an economy.

Policies and intervention that: strengthen the role of public institutions, socially invests in accruing human capital accumulation (education, healthcare, skill development and developing alternate employment opportunities), gauging societal expectations for a better standard of living and well-being are steps of priority in being sensitive to the local politico-economic conditions. Economic facts on the other hand, depend on economic statistics and on the effective functioning of dynamic models that bridge the gap between planning and implementation. Thus, the need for transparent, accountable and verifiable economic data remains the key in designing economic policies (for trade, industry, investment, social security etc.) i.e. for effective state intervention. Economically primitive planning models, in the absence of hardcore numbers on the growth, cannot be made operational and would only allow incumbents at the state level to work in maximizing their own interests.

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Author

Deepanshu Mohan

Professor Deepanshu Mohan finished his BA Economics from Fergusson College, Pune in 2011 and went to do his Masters in Economics History from London School of Economics. Presently, he’s with Jindal School of International Affairs.

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    Source:

    i Endogenous Growth:“Endogenous growth is long-run economic growth at a rate determined by forces that are internal to the economic system, particularly those forces governing the opportunities and incentives to create technological knowledge. For example, the equilibrium price of a good in a supply and demand model is endogenous because it is set by a producer in response to consumer demand”.

    ii Exogenous Growth:“The belief that economic growth arises due to influences outside the economy or company of interest. Exogenous growth assumes that economic prosperity is primarily determined by external rather than internal factors. According to this belief, given a fixed amount of labor and static technology, economic growth will cease at some point, as ongoing production reaches a state of equilibrium based on internal demand factors”.

    iii DaniRodrik, What do we learn from Cross Country Narratives?, In Search of Prosperity (2003)- pp 6; Link: http://press.princeton.edu/chapters/s7518.pdf

    iv The case of Township Village Enterprises (TVEs) highlighted in Y. Quan’s paper on How Reform Worked in China? is highlighted as a classic case of institutional innovation for the Chinese case.

    v Refer to the paper on the Australian growth experience by Ian W. Mclean and Alan M. Taylor here: http://core.ac.uk/download/pdf/9313113.pdf

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