Wednesday, November 28, 2018

Our Obsession with Growth

Our Obsession with Growth

The most dangerous implication of the obsession with economic growth is that it may create a society that is excluded from our economic activities, writes Arief Anshory Yusuf, professor of economics at Padjadjaran University. (Antara Photo/Indrianto Eko Suwarso)

Thirteen economists, including a Nobel laureate and four former chief economists of the World Bank, put forward the so-called Stockholm Statement of development principles in 2016. Topping the list of eight key principles is a warning that economic growth is not an end in itself.

Indeed, we seem to be obsessed with economic growth. Economic growth – or growth, for short – has been the headline of almost all economic discussions in the public discourse or meetings at government offices and economic seminars. It has always been No. 1 on the list of targets to be achieved in annual, medium- or long-term economic planning or government budget documents. Policy makers at the national and regional or local level normally mention growth first in meetings to discuss contemporary or future economic issues. It is not that other aspects of economic development, such as poverty, employment and inequality, are excluded from the discussion, it is just that growth seems to get more attention than it deserves.

Not Without Reason

This lopsided attention to growth has many reasons. Some are valid, but some are questionable. Economic growth is the rate of change over a certain period, such as yearly or quarterly, of gross domestic product (GDP) at the national level or gross regional domestic product (GRDP) at provincial or district level. GDP and GRDP are basically the amount of total income earned by all owners of production that operate in a said region. The main factors of production are labor and capital, such as machinery, land and buildings.

The owner of labor gets a wage or salary, while the owner of capital gets profit. It is important to note that these elements of production operate under the jurisdiction in which the GDP or GRDP is measured, but their owners do not necessarily live in the same region. Hotels and restaurant in Bali or Bandung, West Java, may generate high GRDP (therefore high economic growth) from their activities, but their owners may live somewhere else. Similarly, coal mining in Kalimantan may contribute a lot to that area's growth, but this will not directly increase the prosperity of its residents.

So why do we seem to be obsessed with growth? First, it is a kind of a tradition; a global tradition. The world – promoted by the World Bank – classifies the status of countries to be poor (low income) or rich (high income) based on their income (or GDP) per capita. Higher growth means higher GDP per capita and higher status. Economic growth becomes the mantra to raise a country's economic status to a higher level, such as from low-income to middle-income or high-income. This mantra was spread widely to provincial and local governments, which are given increasing authority over development policy through decentralization. Secondly, GDP has a long history as among the most robust economic indicators. This makes monitoring easier and more reliable.

However, among the most commonly held view, including among academia, on why income per capita (and therefore growth) is important, is that income per capita highly correlates with other important development indicators. Higher economic growth will most likely translate to the improvement of other standard indicators of welfare. How true is this view?

Does Growth Always Lead to Prosperity?

Let us compare GRDP per capita in provinces or districts with another commonly used monetary welfare indicator, namely expenditure per person. Expenditure per person is used in at least three well-known development indicators in Indonesia: Human Development Index, poverty and inequality. Despite both being monetary measurements, they are different in the most important way. GRDP per capita is production-based, so it is prone to capital spillover across jurisdiction (as discussed previously), while expenditure per person is survey-based. It is estimated through a socioeconomic survey that aims to represent the welfare of the residents of the jurisdiction (province or district). That is, those who live in the jurisdiction. This is a very crucial difference.

A simple scatter-plot diagram between district GRDP per capita and expenditure per capita shows a very weak correlation. On a scale of 0 to 1, the correlation is only 0.37, which means higher economic growth in one region will not always translate into a higher standard of living. It also confirms the large inconsistency between the two most commonly used development indicators in Indonesia.

A recent study by the SDGs Center at Padjadjaran University and the United Nations Development Program also suggests a startling finding. The study calculates the cross-provincial correlation between GRDP per capita and 68 officially published indicators of sustainable development and classifies the correlation into four categories: high, moderate, low and no correlation. They found that around two-thirds of the correlations are either low or no correlation.

Reasons for Inconsistency

The first factor is, of course, the one outlined earlier. The larger the component of growth consists of profit earned from capital, the larger the spillover outside the jurisdiction where the economic activities occur. That is why regions that largely depend on natural resources (capital-intensive sector) or the financial sector will tend to have the largest gap between economic growth and citizens' welfare. In a cross-country context where capital mobility and ownership are very low, this may not be a big problem. But in a national context, where capital ownership can be easily moved across jurisdictions, such as between districts in one country, this can be a serious issue. Here, economic growth or GRDP per capita may be a misleading indicator of prosperity.

The second factor is how income from economic growth remaining in the district is distributed across residents. If the benefit of the economic growth is only concentrated among the few, then it will reinforce the capital spillover. They may spend the money somewhere else. And finally, the quality of the institution or governance in the region also matters. Large royalties from natural resources, for example, will end up benefiting only a few cronies in a district with low-quality institutions.

Should We Be Worried?

Should we avoid the growth obsession? Yes. It can lead to bad policy prescriptions. Think about, for example, directing public infrastructure investment, such as water or sanitation facilities. Should it go to low- or high-growth regions? If growth is the main reason, then the answer is to low-growth regions in the name of reducing inter-regional disparity. But what if the infrastructure is needed more in regions with low prosperity despite high growth?

A growth-promoting strategy can also be politically incorrect in a region with high capital spillover. As the mayor or governor of a city or province is elected by residents, the growth-promoting strategy is not necessarily the best for their political constituents.

However, the most dangerous implication of the growth obsession is that it may create a society that is excluded from our economic activities. A potentially destructive time bomb through diminishing social cohesion. This may escalate our existing problems of inequality, identity politics and intolerance.

Let us stop this obsession with growth.

Arief Anshory Yusuf is a professor of economics at Padjadjaran University in Bandung and president of the Indonesian Regional Science Association (IRSA)


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