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Growth. Huh. What is it good for? Absolute poverty

 

Mphatso Gumulira, 15, with her son Zayitwa in the Queen Elizabeth hospital in Blantyre, Malawi. If it continues, Malawi's current economic growth rate of around 6% may improve Zayitwa's prospects. Yet, Malawi's GNI per capita increased very slowly between 1980 and 2012, but life expectancy increased by over 10 years and expected years of schooling has more than doubled in the same period. Photo: Lindsay Mgbor, DFID.

One of the proposed targets of the sustainable development targets for the next 15 years is to promote sustained, inclusive and sustainable economic growth. Whether that and the other goals will be met will depend to a significant extent on the pace and nature of economic growth in India and sub-Saharan Africa.

Probably every country with a free press has one or two newspapers that depict it as besieged by immigrants, crime and/or antisocial youths. More surprising perhaps is that not just one or two but the overwhelming majority of media convey an even more extreme image of the outside world – a world going to hell in a handbasket. The truth is far more positive, so far.

One simple statistic which captures what has happened to human well-being between 1980 and 2013, is that average global life expectancy went from 59 to 71. That progress is extraordinary and has no parallel in human history. Life expectancy at birth in China is now 75. India's life expectancy is 66 – the same as China's in 1980 – up from 55 in 1980.

In the same period, the global economy has more than trebled. So, does growth explain the improvement in life expectancy? According to UNDP data, Chinese GNI per capita increased by over 1400% between 1980 and 2012. India's GNI per capita increased by a more modest 273% in the same period. However, India's improvement in life expectancy was comparable to China's (it increased by much more but started from a lower base). The rest of the global economy grew a bit more slowly than India, but achieved a similar jump in life expectancy.

The most direct cause of rising life expectancy has been the dramatic reduction in child mortality in recent decades. Success in reducing child mortality has been uneven, however. There has been slower progress in reducing death associated with childbirth, even though millions of lives could be saved at low-cost. According to the WHO:

'Every year nearly 41% of all under-five child deaths are among newborn infants, babies in their first 28 days of life or the neonatal period. Three quarters of all newborn deaths occur in the first week of life… Almost 3 million of all the babies who die each year can be saved with low-tech, low-cost care.'

Clearly, policies matter more than growth for global child mortality figures to continue to drop rapidly in the next 15 years. Nevertheless, growth creates an opportunity for significant improvements in health and well-being. In particular, economic growth can dramatically reduce extreme poverty, as it has done in China.

Several countries in Sub-Saharan Africa have experienced tremendous growth in the last 15 years. 'A new force is rising' said Martin Wolf of the Financial Times about India recently. This growth represents a tremendous opportunity for a reduction in extreme poverty, since India and sub-Saharan Africa together account for the lion's share of child malnutrition and premature death. However, they need to grow faster than China to achieve the same increase in income per person because, unlike China, their populations continue to grow considerably. Their economic growth will greatly impact the success or otherwise of the Sustainable Development Goals that are due to be agreed this year to replace the Millennium Development Goals.

Poverty reduction in China has led many to wonder why the development community doesn't forget about aid and focus on growth and the free markets that tend to fuel it. Here are a few reasons why not:

  1. Without direct intervention, millions of children will needlessly die, even in countries that are growing rapidly.
  2. Rapidly rising average incomes does not always translate to rapid poverty reduction.
  3. Good governance and democracy tend to promote economic growth. Yet, the opposite is not always true, particularly in the short run.
  4. Equality has also been found by economists to promote economic growth, but rapidly growing countries often experience rising inequality. Inequality has a powerful effect on human well-being.
  5. Some consider relative poverty to be of similar importance to absolute poverty.
  6. Poorly managed resource extraction and growth can needlessly damage natural resources, livelihoods and the climate, and also leave countries more prone to natural disasters.
  7. Economic growth that is unequally spread by region, ethnic group or religion within a country can lead to conflict

Nevertheless, growth in average per capita income will almost certainly reduce absolute poverty (the number of people living below a certain income threshold), eventually.

Economic growth has been a concern of development economists and governmental and intergovernmental aid agencies since such things have existed. However, the public perception has been very different, because development NGOs rarely talk positively about about growth or free markets. Even when the Trade Justice Movement campaigned successfully against export subsidies, i.e. in favour of freer markets, its slogan was 'fair trade, not free trade'. An unfortunate consequence of NGO communications is that some aid sceptics consider aid to be irrelevant to growth at best or a cause of poverty, at worst, by stifling growth. They are mistaken.

Superficially, it might seem that aid is bad for growth because the countries that receive the most aid as a percentage of GNI are the poorest, but that is an obvious confusion of cause and effect. Some aid critics lump all aid since 1960 together. In reality, aid effectiveness varies widely by donor and has increased considerably in the post-Cold War period, not least because during the Cold War a larger proportion of aid was designed to win allies rather than to promote development or alleviate poverty. New evidence suggests that since 1987, aid has had a significant positive effect on growth.

It is time for development and human rights NGOs to talk more about growth. Nearly everything they try to do promotes growth, such as: improving nutrition, livelihoods, education, health, gender equality and personal freedom. Sustainable development has been a focus of the development community for decades. In practice, it could reasonably be described as sustainable growth.

For governmental and intergovernmental aid agencies, there are strategic, long-term questions about what sort of growth they should help to promote. Primary product exporters may need help to move up the value chain. China's dominance in manufacturing makes it it harder for developing countries to grow, according to The Economist. It recommends investment in telecommunication infrastructure and education, as well as (unsurprisingly) liberalisation of trade and services. Perhaps service industries - which have the advantage of a lower carbon footprint - may be a more important engine of growth for India and sub-Saharan Africa than in China but they may struggle to employ enough of the labour force. In the long run, equality, democracy and stewardship of the environment are pillars of stable sustainable and positive growth. Climate change risks undoing much of the progress that has been made and that will be made in the coming years, so prevention and mitigation deserve prioritisation. The same goes for conflict. Outside help is widely and urgently needed on the African continent if natural resource exploitation is to be a boon rather than a curse.

For the world's poorest countries, aid on a very large scale relative to the size of their economies can have some negative side-effects, particularly on the private sector. In such circumstances, aid does not necessarily have to be reduced but it has to be tailored to maximise its net effect. Projects should be judged not only on their intended direct consequences, but also on their wider effect on the economy. Political consequences are equally important. Public spending that is financed by aid is less accountable to the public than spending financed by taxation.

Aid should also be put into context as a very small part of the global economy, and as only one of many development issues. Non-specialists who complain that aid has not worked often know nothing about how much growth there has been in African countries this century, nor do they know how small aid is per person in recipient countries, nor its size relative to other current or historical financial flows, such as remittances, capital flight, debt repayments or trade.

What about free markets? Unlike politicians, economists the world over are very familiar with the concept of market failure. What is strange is that it doesn't seem to dampen enthusiasm for free markets over the public sector. Simplified economic theory led to a 'one size fits all' approach by the IMF and World Bank known as the Washington consensus. It often involved heavy cuts to public sector spending in developing countries. They have now abandoned a uniform approach given its poor track record.

When it comes to extreme poverty, the role of the state is crucial. Unfortunately, most of the world's poorest have little or no safety net. For hundreds of millions, the result of such a pure incentive to earn is not micro-financed entrepreneurial success, but rather a shortened life in poverty – perhaps dying before their 1st birthday – as market failures.

Nevertheless, government efforts to protect and control trade and industry are rarely very successful. It is a difficult balancing act. Free trade may work best in countries that are already rich, whereas protectionism has the potential to help poorer countries to develop beyond raw material exports. On the other hand, subsidies create vested interests that try to hang onto them indefinitely. Globally, free trade has a better track record than protectionism. Rather than being pro-free-trade or anti-free trade, it may make more sense to take an evidence-based rather than an ideological approach. Different policies may work better in different circumstances. Unintended consequences may negate the best of intentions.

The same goes for free markets. By and large, free markets in non-tradable goods and services are likely to benefit the wider public. Privatisation is more fraught with difficulties. It often enriches well-connected cronies and sometimes merely replaces a state monopoly with a private one. At worst, the newly privatised industries are immediately closed and the equipment and land sold off for a quick profit. After the collapse of the Soviet Union, politically motivated economic shock therapy advised by the West undermined nascent democracy and created a corrupt Mafia-like overclass in many transition countries, not least in Russia. It also decimated manufacturing industry in many countries, which led to unprecedented and, in some cases, persistent unemployment.

The development community is also right to be critical about growth accompanied by rising inequality, but wrong not to talk more about how its work is linked to economic growth.

For good or ill, growth is shaping the climate, resource usage and the future. Directing and managing economic activity is one of the key challenges of the remainder of the century. Goal 8 of the 17 proposed Sustainable Development Goals is to 'Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all'. The other 16 goals, if achieved, would greatly support that aspiration and – to a large extent – vice versa.

As for the media, a bit more coverage of declining child mortality, rising life expectancy, economic growth and sustainability would do no harm.

For more about the post 2015 agenda, see :

Ireland and Kenya are set to lead UN negotiations on development strategy but in what direction?
http://www.un.org/millenniumgoals/beyond2015.shtml
http://sustainabledevelopment.un.org/index.php?menu=1561

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