Professor Danny Quah - Professor of Economics and Head, Economics Department, London School of Economics (LSE)
Lord Adair Turner - Chair, ODI
Simon Maxwell - Director, ODI
The second meeting in the series will examine the role of growth in development, how thinking on this has changed over time, and where we are now conceptually. It will seek to answer questions such as: how should growth be promoted? How should growth reforms be prioritised? And what role is there for the political economy of growth? Professor Danny Quah, Head of Economics at the LSE will present his analysis in answer to these questions and Lord Adair Turner, Chair of ODI will offer his perspective.
Professor Quah opened the discussion with a brief summary of the role of economics as providing the greatest traction in terms of illustrating trade offs. There are false issues in how growth is understood and real issues of growth, related to trade offs. The points covered in the lecture were: 1. Quantitative significance of growth – inequality and poverty; 2. Sources of growth; 3. Global imbalances; 4. Tensions and risks.
1. Quantitative significance of growth
Within the last century, there has been a 50 fold increase in world income, but growth in income has not been equal. Although the world has experienced an unparalleled expansion of goods and services, in some countries, some people are living in conditions not completely different from 100 years ago,
The average person today lives on around $20 a day. In the rich world, that rises to around $30 a day. In poor countries the average person lives on around $10 per day. The very poorest people however, continue to live on $1 a day.
The aggregate picture tells us that there has been an absolute reduction in the number of poor people in the world. Between 1981 and 2004 the number of people living on less than $1 a day fell by 500 million. But the aggregate picture does not tell us how this reduction in the number of people living on $1 a day has been achieved.
2. Sources of growth
The key question, is how the reduction in the number of people living on less than $1 a day is being achieved? Economic growth has been the main driver, but China has been the main contributor. If we look at China, the number of people living on less than $1 a day fell between 1981 and 2004 by around 500 million people. This figure correlates closely to the reduction of the total world poor, those living on less that $1 a day.
If we look at the worlds remaining poor, those living on less than $1 a day, we can see that between 1981 and 2004, numbers have actually risen, slightly. Global growth over the last 25 years has doubled world income (measured using international dollars corrected for inflation and purchasing power parity), the number of people living on less than $1 a day has fallen by a third, but poverty outside of China has actually remained unchanged, or even increased. This means we are meeting the millennium development goals because of growth in China.
3. Global imbalances
If we look at shifts in per capita income over time and the number of people living on $1 a day, since 1990 to 2004, there has been tremendous progress in China, East Asia and the Pacific region, but very little progress in sub-Saharan Africa. This has meant that more people have been put into absolute poverty within sub-Saharan Africa, with some retraction of per capita incomes over this period.
So what about inequality? Can we link growth and inequality together? China’s growth has increased inequality although absolute levels of the number of poor people measured in terms of those living on less than $1 a day, has decreased. Inequality in China now exceeds that of the US (around 0.5 Gini co-efficient).
4. Tensions and risks
In terms of what we know about growth and production functions, our understanding is increasing, but so too is our understanding of the problems associated with the growth process. The global landscape is changing. The US has a huge trade deficit. There are serious issues in terms of world financial systems, environmental concerns and global as well as within country inequality that need to be dealt with, particularly if the growth process is to be positive in the developing world.
Speaker:Lord Adair Turner, Chair of ODI
Why do some countries grow and why don’t others? Does growth really matter to happiness and health? Richard Layard (2007) points out that income matters up to a certain point for happiness. But when average per capita income levels reach around £20-40k, increased income doesn’t really bring much more happiness. Will people really be happier if the UK GDP grows by 0.9% or 2%? Does it really matter? Growth matters a lot more in low income countries.
In terms of taking a longer term perspective on growth, prior to the 18th century, or thereabouts, the world didn’t really grow (as measured by GDP). But around the 18th century something started to happen in Western Europe and the US and Australia, and later Japan further to the Meiji restoration. We have come to expect growth as the norm. We have doubled living standards every thirty years.
Theory suggests that growth rates should be higher in developing countries, permitting them to ‘catch-up’. This is due to the globalisation of trade and capital. But so far, catch-up has been a mixed picture. We have seen partial catch up by the East Asian NICs (to a lesser extent South East Asia), and now China and India. City states such as Singapore and Hong Kong have managed to catch up, with living standards broadly comparable with those in the West.
But, it is still not clear if all countries will catch up. Key questions are therefore, why do some countries catch up and why don’t others? The following factors are fundamental to the growth process.
- Growth accounting: The key lesson from the East Asian experience is that countries need a high savings rate in order to grow. They need to accumulate capital. China’s one child policy has played a role in the ability to maintain saving rates (of around 40-50%). Demography is therefore not tangential but central to China’s growth process.
- Geography: As discussed by Sachs, geography has a key role to play in determining the economic possibilities of countries. That geography has given certain countries a set of natural harbours, and other countries are landlocked, is again not tangential but central to the growth process.
- Clusters: Once an industry gets going, it generates linkages and has self reinforcing cumulative effects. A lot of work has been undertaken analysing clusters ex poste, but not so much in terms of what gets them started in the first place.
- Culture: Does your population need a good work ethic in order to grow? How has the role of culture in East Asia contributed to their growth process? Although corruption exists in China, there is still a workable rule of law. How does culture and the type of governance, particular to countries, contribute to growth?
- Sequencing: With reference to Paul Collier and his most recent publication ‘The Bottom Billion’, over the medium term it has been argued that growth in sub-Saharan Africa will be made more difficult by the success of China, particularly in manufacturing. Economies of scale within manufacturing may mean it is more difficult for new entrants.
So what should our prescription be in order to get growth going? How does climate change impact on growth? How should our growth prescriptions adapt to take into account these new realities? With reference to the Stern report, if adapting to climate change means a reduction in economic growth of a few percentage points then the transition needs to start in the West. We have the technology, the resources and can afford to trade off a few percentage points of economic growth.
Question and answer session:
- How do we get knowledge clusters going? Danny Quah noted that in the case of East Asia clusters were driven by outsourcing mainly. Simon Maxwell remarked that the question that then arises is how the dynamic of clusters is sustained.
- What is the best way for sub-Saharan Africa to get growth? Danny Quah noted that Africa needs to be brought into the world trading system. Trade has a huge role to play in terms of the growth story of China, which trades 70% of its GDP. In terms of the most recent growth performance of sub-Saharan Africa, commodity prices and services are central to the story. But whether this is the start of a longer term growth period for the continent remains to be seen, similarly, how this growth performance contributes to expanding education, for example.
- Is sub-Saharan Africa frozen out of world markets for manufactured goods? Simon Maxwell pointed out that because of the performance of the East Asian NICs and China, does this mean that African is unable to use manufacturing as an industrialisation/ growth strategy? Danny Quah argued that there’s a lump of labour fallacy. If you double the workforce this doesn’t necessarily mean jobs are taken from elsewhere, what it can mean is more growth. International trade and external linkages are a key issue. The system needs to remain open and transparent; if we don’t get this right then all other efforts will fail.
- The overall message from Danny Quah was that we should go for growth in all cases due to the positive first order effects, which are cumulative and self-sustaining.