#RethinkSuccess and the role of growth
by Augusto Lopez-Claros — this is an excerpt of his FULL article viewable here
The past few months have witnessed violent demonstrations in several Latin American countries. Moises Naim and Brian Winter recently published a thoughtful article in Foreign Affairs, titled “Why Latin America Was Primed to Explode” (October 29), in which they make a strong case that following the commodity boom of the early part of the previous decade the recent past has seen a sharp deceleration of economic growth. “Against the backdrop of stagnating wages and rising costs of living, indignities such as inequality and corruption have become more difficult for many people to swallow”
What about economic growth?
Economists — I am one of them — have long studied and argued about the sources and consequences of economic growth. The great development economist Arthur Lewis observed that “the advantage of economic growth is not that wealth increases happiness, but that it increases the range of human choice…The case for economic growth is that it gives man greater control over his environment, and thereby increases his freedom.” For a large portion of humanity, the last several hundred years have involved an inhuman struggle for subsistence, characterized by periods of famine, disease and unremitting drudgery. High infant mortality and brutishly short life spans have been a permanent feature of our existence. Economic growth, said Lewis, “enables him to escape from this servitude” and from the many other menaces which detract from the quality of life. Economic growth allows women to escape from the drudgery of household work and other backbreaking tasks and empowers her to develop many other capacities. Growth and the increased production it brings, coupled with the technological innovations that accompany it, create leisure and open up a world of new possibilities. More people can be spared for other activities and new occupations emerge, including the doctor, the philosopher and the poet.
Economic growth creates an awareness of the needs of others. As societies prosper, more resources are allocated for the disadvantaged, vulnerable groups in society, for the training and education of children. In societies with little or no economic growth, the demands of one group in society can only be met by imposing sacrifices on others, a zero-sum world, often characterized by social strife.
Economic growth has been slow up to 1820 with no visible growth within the lifetime of any one individual. Without economic growth and the prosperity that it brings, governing becomes a bitter occupation. Since legitimate aspirations for some material progress cannot be met, the outcome is often political repression. But this is a dead end; in time lack of growth will lead to complacency and resignation, a sense that “stability” is the primary attribute of life and that there is little sense in searching for opportunities for economic gain: there are none to be had.
What happens in a situation of fast growth?
Lewis was impressively clear-eyed about some of the potential problems associated with rapid economic growth. He thought that economic growth tended to be associated with the disappearance of the extended family, the erosion of social systems based on status and their replacement by systems based on contract, equality of opportunity and high levels of vertical social mobility. These, he said, had the potential for upsetting existing relationships and interacted — sometimes in unpredictable ways — with issues of class, religion and political authority. Thus, growth was not without its dangers — think of rapidly-growing Iran in the 1960s and 70s and its metamorphosis in 1979 into a repressive theocracy ruled by corrupt mullahs. Economic growth could coexist with rising inequality and, if unchecked, could put increasing pressures on the environment. In the Soviet Union, rapid economic growth was associated with an appalling deterioration in the quality of the physical environment. Moreover, its rulers did not think that its benefits should be tied to the need to improve the standard of living of the average citizen. By the time it collapsed, the Soviet Union was a military giant with an impoverished population, a classic case of “immiserating growth.”
While emphasizing the substantial benefits of more rapid economic growth, Lewis accepted the possibility that the growth process could have costs “in social or spiritual terms” and that societies should carefully weigh, in light of their individual circumstances and values, the benefits against the costs.
Lewis thought two factors would play a critical role in how the debate on the benefits and costs of economic growth evolved.
First, the forces of globalization were leading to a faster expansion in aspirations than in economic production.
Second, mortality rates were falling faster than birth rates.
A growing gap between aspirations and production could be dangerous and lead to political instability. As part of this, one could see the rise of “native breeds of fascism” — for example, warlordism and Latin American “caudillos” — or the arrival to power of religious fanatics. As for population growth, rising living standards were needed to check its growth and this was one of the strongest arguments in favour of faster economic growth, particularly in the developing world.
A moral dimension
Half a century later, Harvard University’s Benjamin Friedman revisited the case for economic growth in his 2005 book The Moral Consequences of Economic Growth. If Lewis had focused attention on the benefits of economic growth, Friedman had much to say about the ramifications of its absence. Because of increasing concern about the environmental impact of rapid economic growth, the undesirable side effects of rapid industrialization and globalization, including the erosion of cultural diversity, we had begun to see growth not merely in terms of its ability to improve living standards, but also in its moral dimension. The whole debate about sustainable development had a strong moral underpinning, articulated in terms of our responsibility for the welfare of future generations and their ability to sustain broadly similar standards of living.
For Friedman, however, the weighing of “material positives against moral negatives” needed to be buttressed by a closer examination of the ways in which rising living standards shaped “the social, political, and ultimately the moral character of a people.” The gist of his thesis is that economic growth “fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy,” while economic stagnation can often lead to retrogression with respect to these worthy social goals.
So, Friedman makes the case that economic growth has become the primary engine of social stability and well-being. Growth has become a social and political imperative everywhere. In the developing countries, because it is the locomotive of poverty reduction and improvements in living standards; in the rich countries because we live in a world of rising expectations in which the values of a consumer society and materialism have created their own compelling logic, one of endless accumulation, regardless of whether it leads to greater happiness or spiritual fulfilment. The unanswered question is whether unbounded economic growth is consistent with the key parameters that determine the sustainability of life on our planet.
Enough diagnosis. Let me offer some possible solutions:
Take inequality seriously. Governments need to move more aggressively to reduce income inequality. This will mean more proactive use of tax policies and the budget as an instrument of distribution. This is what EU members have been doing for the past several decades, in a clearly deliberate way. Of course, this is easier done when governments are credible and citizens and the business community are convinced that higher taxes will not be stolen or otherwise wasted, but will be reflected in better schools, better quality infrastructure, improved public health services, and so on. The EU has a formal mechanism, embedded in EU law, which channels resources from members with higher incomes to members with incomes below the EU average. These resources are channeled through the EU budget and have had vast implications for the poorer members. When Spain and Portugal joined the EU in 1986, they were “poor” in relation to the more established members, and they began to receive close to 5 percent of GDP on an annual basis as “structural” funds and other inflows which, within a generation, literally transformed and helped modernize the Spanish and Portuguese economies. Latin America, regrettably, does not have in place such an ambitious program of economic and political integration, and has paid a heavy price for not creating an integrated economic space that might lead to economies of scale and improved efficiency (see below).
Improve the structure of government spending. Whatever revenue is collected needs to be better deployed. The problems here are multiple and insidious. In some countries too much is spent on wasteful government subsidies which, in the case of energy, go largely to benefit the upper income groups, who drive their cars in polluted cities and own the bigger houses. Subsidizing energy worsens income distribution and accelerates climate change; it is, in fact an idiotic public policy, followed gleefully in many countries in the region, with huge opportunity costs in terms of schools not built, hospitals not modernized, old-age pensions not boosted to more dignified levels. Other countries have tied their hands in senseless ways, by embedding in their laws various (sometimes seemingly well-meaning) restrictions on the structure of spending which seriously limit the ability of governments to redirect resources to more productivity-enhancing areas, instead of, for example, generous pensions for the military, who, in many countries, can retire at an unusually young age, given life expectancy levels. Latin American countries spend annually US$64 billion in their various military establishments, and that in a region of the world where the last major interstate conflict took place more than 80 years ago — the Chaco war between Bolivia and Paraguay in the 1930s. The IMF calls military spending “unproductive expenditures,” to highlight the well-known fact that there is not much to be gained by, say, modernizing the air force, when airplanes will actually hardly ever be used, other than to occasionally impress the populations on national independence day and the associated military parades. More countries should imitate Costa Rica, where military spending is zero and the government instead has focused on human capital development and, yes, having a well-trained policy force to enforce the law, deter crime and ensure appropriate levels of safety within national borders.
More rule of law. We in Latin America have a mistaken understanding of this concept. At various times and to various people “rule of law” has meant any of a number of things, including government bound by law, equality before the law, law and order, the presence of a predictably efficient system of justice, and the existence of a state that safeguards human rights. Some have argued that the concept is linked to notions of liberty and democracy, necessarily implying constraints on the power of the state and guarantees of basic freedoms for citizens, such as speech and association. In this view, the rule of law has elements of political morality and is very much a foundation for a just society. It is certainly inseparable from the morality underpinning contemporary democracy, with its emphasis on the protection of individual rights, including those of free expression, voting, and the right to private property. In Latin America, however, our politicians have generally taken a much narrower view. Instead of asking ourselves whether the laws are of general application, are well-known to the affected parties, are understandable, not subject to internal contradictions, not applied retroactively, not subject to frequent and arbitrary changes, etc., we have instead interpreted the rule of law to mean the rule by law, meaning that the there is no presumption of government subordination to the law, which is seen as a vehicle not to limit its power, but rather to serve its purposes. This is what some authoritarians mean when they talk about the “dictatorship of the law” — that is, the government may do as it pleases. People in the region, particularly the young, may not be able to articulate these distinctions precisely, but they readily recognize abuse when they see it (i.e., rigged elections) and are no longer willing to tolerate it. Going out into the streets to remind politicians that insulting the people’s intelligence is not a recipe for good governance will be an increasingly frequent tool to promote social and political change.
Empower women. This may surprise some, but the fact remains that the region, while not the worst performer in the world in terms of its treatment of women as second class citizens, is still very much a male-dominated culture where much remains to be done in terms of the political and economic empowerment of women. In Brazil, the largest country in the region, with a population in excess of 200 million, only 15 percent of the members of parliament are women. The presence of women on the boards of publicly listed companies is, likewise, pitifully small. The issue here is not just one of justice and opportunity, it is also one of economic efficiency, as there is overwhelming empirical evidence that educating and empowering women has multiple benefits for productivity and economic growth.
Tackle corruption. I will not review here the utterly destructive consequences of corruption, as there is an extensive literature on the subject. But it is clear that there is profound discontent in the region with this particularly lethal form of economic and social cancer. In his magnificent book on bribery and corruption, John Noonan (1984) said that the damage inflicted by corruption “goes beyond any material measurement. When government officials act to enrich themselves, they act against the fabric on which they depend, for what else does government rest upon except the expectation that those chosen to act for the public welfare will serve that welfare?” Furthermore, bribery and corruption are deeply at odds with the moral basis of most of the world’s great religions, which have often provided the moral underpinnings of the modern state. Anticorruption strategies have to be supported by moral education and the strengthening of the ethical principles underpinning society. This may mean reinforcing the civic responsibility component of secular education. It may require religious leaders to set aside narrow doctrinal differences and return to the spiritual roots of their respective faiths to revitalize their ability to lead individuals and societies to a stronger identification with the spiritual, rather than the material dimension of human nature. In particular, it will involve partnerships with all the organizations and social forces that have a strong ethical foundation. In a society with strong ethical standards, the struggle against corruption will gain a new source of strength that will complement the progress made in recent years in improving the legal framework designed to combat bribery and corruption.
A new idea to revitalize Latin America. Against the background of the chaos and destruction of World War II, the nations of Europe came together and founded the European Community in 1957. Initially intended to strengthen international cooperation and create an enlarged economic space, free of restrictions to the flow of goods and services, in time the EC evolved into the most important experiment in economic and political integration and gave rise to the largest trading block in the world. The process has not been smooth and progress in some areas has sometimes been followed by setbacks in others. But there is little doubt that, in a longer-term perspective, the experiment has been remarkably successful; 15 of the 30 countries in the world with the highest income per capita are members of the European Union. Latin America would benefit greatly from greater economic integration, from freer mobility of the factors of production, from creating an enlarged economic space where synergies and complementarities could be exploited to improve productivity and efficiency, as opposed to being a chaotic collection of sovereign states competing with each other and often acting at cross purposes. The EU evolved gradually; its first decade was largely characterized by the gradual elimination of tariffs on intra-European trade. Supranational institutions (e.g., a parliament passing EU law binding on its members) was decades away. But the idea of a united Europe was a powerful cohesive force and, for prospective new members (e.g., countries in Central and Eastern Europe in the late 1980s after the collapse of the Berlin Wall and thereafter) served as an effective catalyst for change and modernization and, as noted earlier in our discussion of inequality, a powerful mechanism for “convergence,” the narrowing of income gaps between countries.
Without an exciting new vision of economic revival, the region is likely to continue to be gripped by the malaise alluded to by Naim and Winter. This will be bad for Latin America’s 641 million citizens, and, in an increasingly interdependent world, bad for the rest of the world as well.
The above is an excerpt of Augusto Lopez-Claros FULL article viewable here