The Diseconomics of Growth

H.V. Hodson

Chapter V.

Growth in the Poorer Half-World

For the economically most advanced countries, realised growth may be deemed a luxury. They can afford to do without it. That is to say, they can afford to do other things with their increasing capacity to produce than go on producing more and more; they could produce better and better things, safer and cleaner things, they could use their extra capacity to undo some of the mischief done in the past to the environment; rather than enlarge the consumable cake they could cut their existing cake more fairly, without making anyone’s slice too painfully small; they could relax their competitive strivings, living more simply, less tensely, on the same standards as they enjoy now. In such senses they can afford to do without growth. Though they may not make the best of it, most of them have had plenty already.

What, then, about the poorer countries of the world? Economic growth for them is surely a Must, a superpriority, since it would seem the necessary means to other advancement whose benefits are not to be measured in money: health, education, longer life. Before we accept this conclusion out of hand, with all its implications, we should reflect on two points.

First, convenient as it may be for political purposes, such as aid policies or special relations with the European Common Market, and for the purposes of rough-and-ready judgments about world trade and economic behaviour, to classify countries into developed and less developed, DCs and LDCs, there is in fact a fairly continuous spectrum between the extremes of poverty and wealth among the world’s national units, and in the middle of it the distinction becomes somewhat arbitrary. Moreover, all but the most advanced countries, like the United States, and perhaps even they, have poorer, “less developed” areas or sectors, while all but the most backward, like Botswana, have sectors whose level both of income and of technical activity is comparable with at least the middling elements of the “developed”. The most obvious example of such a mix is Soviet Russia, which at one end of the scale boasts a space industry and a nuclear industry rivalled only by the United States, and at the other end embraces millions of people, especially in the southern Asiatic republics, in Siberia and on the fringes of central Russia, whose ways of life and economic standards have probably changed little since Tsarist days, and hardly differ from those of non-Soviet peoples labelled without hesitation “less developed”. In “capitalist” Europe itself, many people in the poorer parts of the Mediterranean countries, from Portugal to Greece, live at material standards no higher than prevail on the other side of the Middle Sea. In Latin America the co-existence of mass poverty and minority wealth is all too obvious. Even in Asia and Africa, if we had no Europe and North America to compare them with, we should at once have to classify countries or areas as economically relatively developed or less developed.

It follows that any judgment which declares that this or that is or ought to be in developed countries, and that something radically different is or ought to be in less developed countries, can only be a very crude first approximation.

We should be particularly wary of such judgments in the economic field. For economics, if it is a science, ought to propound universal propositions, not propositions that are true only of certain times or places, unless the limiting conditions are clearly written into the propositions themselves. There cannot be one law of economic growth in richer countries and another in poorer, unless the law itself is expressed in terms of relative riches or poverty. Economists who argue, for example, that in developed countries growth is led by demand cannot turn round and say that in less developed countries it is led by capital investment or something else, unless their theories are so constructed as to have comparative wealth in their logical framework.

There are certain propositions about economic growth, as ordinarily measured, that possess a universal character. Growth tends to be self-generating: the means of growth are created by growth, unless it is all consumed, which is unlikely. It is never uniformly spread, but involves expansion here, contraction there. It always costs a price, in productive capacity not used for consumption but directed to investment, in displacement of labour and purchasing power, in resources used up or defiled. It tends, without correction, to make the better-off richer rather than the poor less poor. It has points both good and bad: the capacity for higher standards of material life, the familiar evils of pollution, urbanisation and injury to traditional ways of life.

All these truths apply everywhere, though their relative weight may well vary greatly, according to their inherent nature. They apply to the economic growth of the world as a whole. In this growth, and in its consequences, the less developed countries share to some extent, even though they may initially contribute little to it. They share in its benefits; for rising material standards heighten demand for their products, and create a tourist industry from which so many poorer countries gain; while their ability to make the cheaper and simpler forms of goods, like textiles and clothing and footwear, fills gaps formed in the economies of the more advanced countries when their capacity is directed to newer, more expansive industries like engineering, electronics and sophisticated services. (The decay of the Lancashire cotton industry has been just as important an element in the economic growth of England since the 1930s as the expansion of the Midlands car industry.) Less developed countries also share in the noxious fall-out of world economic growth, the fouler air and such climatic changes as may follow the present growth-begotten adventures in the atmosphere and outer space. Their interests have to be borne in mind in any conclusions we may reach about economic growth generally.

The converse is also true, that the richer countries share to some extent in the outcome of economic growth in the poorer. Their consciences are appeased, of course, but we are here talking about hard economic facts, not political and social sentiment. They gain thereby larger markets for their capital goods and complex products. They find more opportunities for their investment, their trade and their transport systems. The terms of trade (that is, the quantity of goods they can buy in exchange for a given quantity of goods they sell) may turn adversely for them, as the poorer countries use more of their own raw produce and become less dependent on a few products which they must sell on inelastic world markets, and as the output cost of, say, minerals rises to afford their producers a better income; but this is by no means certain and would be a price the richer should not grudge for the real betterment it would mean for their less fortunate fellow men.

The second general point on which we should reflect is that if the poorer countries most need economic growth, many of them also stand in the greatest need of other requirements of a fuller, better life for their peoples, not all of which rest upon economic growth: equitable sharing of national wealth, dignity, freedom and opportunity for the individual, personal security, group co-operation... “Development” in the earlier days of post-war aid to the LDCs was largely identified with economic advancement and growth. Now more thoughtful and wider-embracing concepts of development have emerged. Thus the Second World Food Congress in 1970 defined development as “social justice, self-reliance and economic growth.” Experience in the previous two decades had shown that the first two of those objectives did not by any means necessarily flow from the third, which the Congress now placed in a comparatively low position. The World Council of Churches, inherently more concerned with moral and social than with economic values, has suggested that development should be measured by “the quality of social environment, including the relational, social-psychological and spiritual environment in which individuals and groups exist.” The United Nations Development Strategy for the Second Development Decade declares that “the ultimate objective of development must be to bring about sustained improvement in the well-being of the individual and bestow benefits on all.” “Development,” declared Commission VIII of the Second World Food Congress, “must transform society as well as improve it.” Social justice, personal dignity and freedom, security of life and liberty, these are paramount needs of every nation, rich and poor. But for historical reasons many poor countries are more deprived of them than are the rich. To enlarge them must rank at least in parallel with economic growth, which without them is but the husk of greater well-being.

When all that is said, however, the less developed countries undoubtedly need economic growth. For them, to stand still is no viable alternative. Their populations are growing, and in most cases growing much too fast for their social and economic health. Every little rise in their standards makes their need for economic expansion greater. An Indian peasant or village labourer, living in the traditional fashion handed down through thousands of years, needed in the way of equipment for himself and his family (besides the elementary consumables of food, clothing and fuel) only a hut, a few domestic utensils and simple tools, and a dusty track to the fields, the jungle, the watercourse or the bazaar. In this sort of economy there can be a millennial equilibrium without growth—although, if numbers multiply, the land is exhausted, the trees are cut down, and the equilibrium is undermined from below. But if you add to the man’s needs schooling, health aid, transport, capital works (even so elementary as small earth dams for irrigation and water storage) and tools to raise his productivity from the most primitive level, then you can count for every man, for every family, an irreducible need of some hundreds of dollars of public and private capital to furnish him out for the simplest, least ambitious life.

Remember this in the context of rising numbers. The problem of population in countries like India or Egypt is often talked of as if it were essentially, if not solely, one of food. But in the literal sense man does not live by bread alone. It is something to have enough to eat, but that is not all, even of the elementary necessities of life. And more food does not emerge, even if there is spare land, without the capital and consumable requirements of implements, fertiliser, irrigation, storage, transport needed to grow it, husband it and bring it to use. In terms of human capital, too, to grow more food or otherwise raise his standards as a man needs better health, better education, better domestic conditions. All this costs money, it costs national resources. Growing population multiplies the cost. Joseph Springler has estimated that “a population growing one per cent per year absorbs capital amounting to something like 4 per cent of national income,” (Population Review, 1962).

Where are the resources to come from? Only from some surplus above the income that is annually consumed, and a surplus, obviously, which has to be all the greater as numbers rise and these basic requirements are correspondingly enlarged. It is one of the daunting dilemmas of this aspect of human life on the globe today that the more rapid the rise in population in a poor country, the more growth it needs to keep its standards even where they are, yet the less of the means of growth is it likely to have, because a first charge on any surplus output (above consumption for its existing numbers together with maintenance of its existing capital) is levied by consumption for the increment of population.

If growth is the requirement, what is the requirement for growth? It is, essentially, enlarged investment. This does not mean necessarily great slabs of capital, for mammoth dams, huge factories, steelworks and so on; but capital in packets of all sizes, from ploughs and storage bins and simple irrigation works and village industries and better seed to nation-wide apparatus for education, health (including family planning) and transport. Capital for investment, however, is precisely what these poorer countries are short of; for low incomes mean still lower savings. The demand for investment, including public investment, is liable to lead to inflation, by way of unbalanced public finance or excessive monetary credit; inflation is a sort of forced levy, which if it is imposed as the means to productive national investment has its excuses; but it inevitably hits the poor to enrich the advantaged, and if this is unjust in countries with comfortable standards it is criminal in those where the poor are on the edge of starvation.

The breakthrough to a satisfactory, self-reproducing investment level may be made with the help of foreign capital. It must be remembered that almost any form of unrequited material or financial aid is potential capital funds: if, for instance, a rich country gives a poor country 10 million dollars worth of surplus food grain, the recipient government can sell it to its people and use the cash as capital for investment. Such stern finance, however, is not common. Foreign investment in industry or public works, or even in a flow of imported goods, especially capital goods, whether it is commercial investment or by way of aid, clearly helps directly, provided that the object of investment is sound from the standpoint of contributing to productivity and growth. It is probable that private capital, notably direct investment by business firms in local plant or subsidiaries, or credit sales, has done as much for the economic growth of less developed countries as government aid. Nevertheless, only the smallest and weakest of the less developed countries can hope to get more than a small fraction of their investment needs from aid or outside capital—unless they have rich resources like oil, or until in fact they have achieved an internal breakthrough and have created industries and commerce to which capital will be attracted for reasons of profit.

So the less developed countries generally have somehow to find the bulk of their capital for investment from their own people and production. This is their problem, and there are various ways of solving it. The best is probably the encouragement of small industries, cooperatives and local enterprises, and other such means which tempt productive investment by the middle classes and all those above the subsistence line, instead of consumption or hoarding. On a larger scale, the Regional Development Banks are helping to turn the trick, by investments which call for local participation. Population growth remains the biggest burden and handicap.

Daunting as is the problem of getting rapid growth in a poor country, it can be and has been solved, here and there. If you look at the notorious “league table” of current growth rates of Gross National Product you find in the Top Twenty half-a-dozen LDCs, as well as some of the middle-range countries with large “less developed” segments: you find Taiwan, South Korea, Hong Kong, even Indonesia. How come that they can achieve “economic growth” comparable to and even exceeding that of rich countries of the West? If they have the secret, why cannot it be handed on to all the others? One must, of course, be wary of taking the figures at their face value: statistics are not so reliably collected, carefully used or critically evaluated as they are in lands that can afford elaborate censuses of income and production and a great cloud of professional witnesses. Some of the increase in recorded GNP may be due to the progressive inclusion of more known money incomes; if a country is moving, for instance, even marginally, from a family-subsistence to an exchange economy at the grass-roots, the recorded total of national income will go up although there has been little or no increase in real production. With all discounts, however, there is no doubt that some LDCs have achieved substantial growth of GNP during the last decade, and this, there is no need to repeat, tends to be a self-stimulating process. Whether it has been or is enough to take care of their expanding populations, not only in consumable income but also in public and private durable equipment, is another question. Indonesia is one of the countries with a good score, but anyone who studies the Indonesian economy knows that the pressure of population upon some of the most intensely cultivated land in the world is threatening the whole expansive process like a time-bomb with an ever-shortening fuse.

It is also significant that the best figures for growth of GNP among the LDCs are recorded by countries which either have a major national resource which the world craves, like oil, so that their economies are constantly fuelled with money from the richer half, or, like Hong Kong, participate in the richer half’s economic wealth and growth through industrial production and trade. We see here not only the generative power of capital investment but also an illustration of the fact, noted above as one of the universal characteristics of growth, that it is never uniform but goes much faster in some sections of the economy than in others. This fact is epitomised in the phrase “growth points.” Less developed as well as more advanced countries have growth points, like pinnacles or hillocks in a plain of little-changing production, and if they want growth they may have to pay the price of fostering their growth points to the comparative neglect of the overall mass, trusting to the filtration of the market economy to spread the benefits more widely, or taking special government measures—taxation, subsidy or other—to accelerate and equalise the spreading process.

The strategy being adopted by some of the LDCs is one of selective growth points. India, for instance, has instituted under her Fourth and Fifth Plans a system of “growth centres,” constructed from the larger and more prosperous rural towns, whose existing progress is boosted by improved transport, power, education and other services and amenities. This is the policy of backing success rather than propping up weakness. It is the more likely to promote overall national economic growth, but it is the less likely to achieve the purpose of raising the poorest and reducing inequalities.

One may spare an aside at this point for the famous Green Revolution, the introduction of new seed strains and linked methods of cultivation which, pioneered by American-financed research, has greatly increased the output of food, especially wheat and rice, first in Mexico and then in other Latin American countries and in India, Pakistan, the Philippines. This technological advance has had a decisive effect in the past five years upon the self-sufficiency of such countries in food and upon the immediate pressure of their growing populations upon the food supply available. It has been a key factor in their recorded economic growth. But it has created other problems which could, if neglected, countervail its benefit to development in the more comprehensive sense. One is that the extra output from the land needs not only the high-yielding strains but also more irrigation, better cultivation; so the production cost of food has not been significantly lowered. The very poor in such countries go short of food not primarily because there is not enough food anywhere for them to eat, but because they have no money to buy more. So, if the Green Revolution is not to make the well-fed better-fed while the starving still starve, a redistributive exercise is necessary, by subsidy or otherwise. In the words of Dr Hellmuth Fuehrer of the OECD Secretariat in an address to the 1971 General Conference of the International Council of Voluntary Agencies:

While the population-food balance has been somewhat eased as a result of the Green Revolution, great problems of undernourishment and malnutrition remain. This is not only a production but also an income problem... The problem of proper food supplies cannot be solved in isolation: it is one aspect of the overall problem of economic and social development including alleviation of poverty and education of consumers. Even under the most optimistic assumptions large segments of the population in developing countries will continue to remain so poor for many years to come that they will not be able to purchase adequate diets.

Another problem is that the better agriculture means fewer people working on the land and in its fringe occupations In default of counter-action, more people will drift from villages to cities, already overcrowded and beset with unemployment. Thirdly, the policy of backing success, which has been shown to be the best formula for economic growth, means favour for the areas best able, because of their soil, rainfall or land-tenure structure, to take advantage of the new technology, and is thus liable, without redress, to create a new hierarchy of richer and poorer areas and populations within the rural economies of these lands. Fourthly, the total ecological effect, or the cost-benefit in energy, of the use of higher-yielding strains combined with more irrigation and chemical fertilisers and pesticides, has yet to be demonstrated, and may well be adverse. These incidental problems are far from detracting from the immense benefits the Green Revolution has brought: they only underline the fact that it is only one piece in a much larger jigsaw puzzle.

Whether with the aid of the Green Revolution or otherwise, some LDCs have achieved and will probably go on achieving rates of growth of GNP which exceed those of all but a few of the more affluent nations. The average annual growth-rate for all LDCs combined has been about 5 per cent during the last decade. This is the same rate as was achieved by the group of advanced industrial societies in the OECD. To quote Dr Fuehrer again:

It is an extremely high rate of growth by all historical standards; it means a doubling in 15 years and implies tremendous changes in the structure of production and employment and social conditions.

However, as has become abundantly clear in recent years, economic growth does not necessarily mean better conditions of life for all. First of all, roughly half the expansion in production has been absorbed by the tremendous increase in population. Moreover, the fruits of the economic advances have gone to a minority of the population in the developing countries. There has been a widening of the gap in the levels of living not only between industrial and developing countries but also more dramatically and visibly between different categories of people within the developing countries.

As to the gap between the industrialised and developing countries, it is often argued that even if some of the latter have higher growth-rates than many of the former (as is the case), this does nothing to close the gulf between rich and poor, because the rich are getting richer all the time, even when the poor are getting a little less poor. If it were not for the complication of relative population growth, this would be an arithmetical fallacy.

Suppose that rich country R has an average income (GNP per head), call it x, ten times as high as that of poor country P, so that the gap between them is nine tenths of x, or 90 units of subsistence income; and that their respective growth rates of GNP per head are 2 and a half and 5 per cent. When R’s average income increases by 2 and a half per cent, to 1.025 times x, and P’s average income increases by 5 per cent, to 1.05 times one-tenth of x, then the gap between them becomes 0.92 times x, or 92 units of income—two units greater than before. The gap has widened! Obviously, people often go on to say, the longer this process continues the wider the absolute gap will be. Country P may grow relatively a little less poor than country R, but in absolute terms the gulf between riches and poverty becomes ever wider. Obvious, perhaps, but not true. Project those figures into the more distant future. After discounting population changes, country R continues to grow economically at 2 and a half per cent per annum compound, country P at 5 per cent per annum compound. R’s average income doubles in 28 years, P’s in a little more than 14 years. So, some 84 years later, R’s average income will have doubled three times (IE been multiplied by 8), while P’s will have doubled six times (IE been multiplied by 64). R’s average income is now 8 times x, P’s is 64 times one-tenth of x, or roughly 64 times x. P has nearly caught up R in absolute wealth, and in another decade will have actually done so. The gap has closed and disappeared!

The plain arithmetical truth is that if any country’s growth rate continually exceeds, even by a small percentage, the growth rate of another country, the first country will in the end catch up on the second, however far behind it starts. How long this catching-up will take manifestly depends on how big the extra margin of growth rate is, and how far apart they start, but it will happen within measurable time.

It is worth pondering what this means. Just suppose that by dint of some uninterrupted feat of planning, some spectacular change in population trends combined with steady investment of capital in development, some formula of break-through to a growth economy which every less developed country could observe, they all increased their Gross National Products to the then existing level of those of the advanced countries, within say a century, or even two centuries, from now. Long before that they would have become as rich as we of the affluent West are today. It is a prospect we have to consider when we praise the present growth rates of some of the more fortunate of the poorer countries and congratulate ourselves and them that with our aid they have begun to raise themselves from poverty and to record even better percentage performances than ourselves. Is this a paradise of universal affluence or a spectre of economic and human disaster?

We cannot deny to others a right to the economic growth that we laud and strive for ourselves. But even assuming a reign of universal peace and concord, in which we had no need to dread the appearance of a China or an India or a black Africa with all the military and economic power that its rich, industrialised hundreds of millions would possess, the demand for natural resources (which the rich consume so much faster than the poor) would long before then have become intolerable. It is no good our saying “Of course we want economic growth for the less developed, but only a moderate amount of it, after which let them, please heaven, go on being poor,” even though this may be what we unconsciously believe. Growth cannot be turned on like a tap, nor can it be turned off like a tap, certainly not by an alien hand. We cannot, from our platform of affluence, ration growth, though we can help to promote it. Our ideology of growth ought to be all in one piece.

That glimpse of a possible future is of course highly speculative. What could happen may very well not happen, for many reasons, some of which we can see while others lie hidden in the womb of economic history. But even in the short run, that is to say the next decade or two, the economic growth of the less developed countries will show symptoms recalling the more alarming aspects of our own. Suppose that in certain of the LDCs there continues to be, as there is today, heightened productivity and economic growth in the conventional sense of a rise in Gross National Product per head—or even in Gross National Product itself. The evil consequences which flow from growth in more advanced countries will surely in a measure afflict them also: pollution of air and water, disturbance of natural environment and rhythm, exhaustion of resources, shifts of work opportunity accompanied by painful human dislocation, urbanisation and congestion. Indeed this is so, but we have to allow that the balance of interest is, for the time being, different for the poorer countries than for the rich. A man who is lucky if he and his family eat one satisfactory meal a day will not rank the preservation of wild natural beauty high in the order of his immediate needs. A man living in a hovel in a shanty town is not bothered too much about fumes from automobiles or noise from aeroplanes.

People inured to disease and absence of medical care have needs which come before a garbage recycling system, or a water supply that would satisfy New Yorkers. A man who has to sell his few possessions to live does not worry about the using-up of his country’s resources of land or minerals, as the price of national economic advance of which he and his like may one day reap the fruits. Thus we may sympathise with the views of Dr Boerma, director general of the UN Food and Agriculture Organisation, when he told its governing conference in November 1971 that in regard to the use of DDT and other pesticides a distinction had to be made between industrialised and developing countries. The former were concerned about pollution while the latter had environmental problems which could be solved only by raising standards of living. We can agree that, in the poorer countries, until the poverty cycle is broken, deferred costs of growth can be subject to a discount.

Yet they cannot be ignored. The poorer a country, the more dependent it almost certainly is upon nature, upon the yield of land and forest and river and sea. The more densely populated, the heavier its pressure upon the gifts of nature at its hand. If it presses too hard, if it undermines the recuperative, regenerative and productive powers of nature, it destroys its means of subsistence, and all the apparent economic growth that it may achieve will be futile. Forests cut down, or burnt for agricultural clearings, mean erosion and eventual impoverishment of the soil: they may mean harmful changes of climate, drying-up of soil, falling water-table. The price is too great. If a river in the United States or Britain is too polluted for fish, it is sad, but very marginal for the total food supplies even of its own region; but if rivers are polluted in, say, Bangla Desh or Indonesia the fishermen and those around them may starve. The price is too great. Economic growth can still be accompanied by impoverishment for many, and in the end by catastrophe for all.

In national policies, the question presents itself as one of priorities. We have assumed more growth of GNP. To what purpose is that growth margin to be put? Unless some goes into preserving the natural habitat—by soil improvement, afforestation, cleansing and re-stocking of waters, and so on—the gain may soon turn to loss. Unless some goes into solving the problems of over-crowded cities, which growth itself will heighten, the end will be disaster. Unless much is used for the basic human substructure of growth, that is to say, health and education, the whole process will be precarious. A fairer distribution of the whole may itself temporarily cost some of the margin, for the rich are bigger instigators of growth than the poor; but without it the country may head for social catastrophe and revolution.

We cannot attribute to the government of less developed countries the wisdom of Solomon. We cannot take for granted that they have all the information on which to base right policies for growth and its use, or the administrative means to apply them. We know, on the contrary, that there are grave defects in all these matters in every country, not excluding our own. It is not for us, from our pulpit of affluence, to preach an ideal behaviour which we are far from displaying ourselves in our different circumstances, nor to reproach those governments because they fall short of what we might think best for them. Theirs is the responsibility to their own peoples, and they can only discharge it according to their lights. But we can at least keep our own minds clear, and apply sound principles to our own policies towards them: not over-stressing the value of economic growth for its own sake, but rather the purpose that it is to serve; not judging performance by crude economic growth figures alone, for they may be highly misleading, but discounting it for those factors, positive and negative, which can convert it more nearly to an index of long-term improvement; directing the aid we offer, including especially technical aid, to those objects which can promote sound potential economic growth at the least cost in evil fall-out.

But far more important than this is the example we set. How can we expect poor countries, with far more excuse in the wretchedness of their people’s standards and the crying need to break the poverty cycle at any price, to be wise and prudent in the use and protection of their resources when we are recklessly extravagant with our own (and often with theirs too)? How can we expect them to set themselves goals and standards embracing such intangibles as peace, beauty, contentment, friendliness, when they see us in a constant competitive struggle for speed, power and material wealth? In such things we may have more to learn from them than they from us.

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