Economic growth and growth mania: A shift

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The economic theories of growth have been rather abstract and formalistic and much more attention has been paid to the various growth models than to their empirical and practical relevance, which is fairly low.

CJ: Vinod Anand

Wed, Nov 25, 2009 11:18:58 IST

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Economic Growth :

ECONOMIC GROWTH is defined as the steady process of increasing productive capacity of the economy and hence of increasing national income. In other words, economic growth is the overtime change in national income. And once this overtime change is divided by the national income, it gives the rate of economic growth. Beyond that is the equilibrium rate of economic growth that is the rate at which investment equals savings. In symbolic terms, economic growth is defined as dY/dt, where Y is national income and the rate of economic growth is (dY/dt) divided by Y and the equilibrium rate of economic growth is the one at which I= S.

The analysis of economic growth has played an increasingly important role in economics. On the one hand, awareness of the problems of developing countries and inapplicability of conventional tools to these problems has led to the development of a whole body of theoretical and descriptive economics concerned with them. On the other hand, the shift of emphasis away from the problem of persistent unemployment in advanced industrialised capitalist economies towards the problem of full employment has naturally led to the questions of what determines the rate at which the economy grows over time.

No definite answers to this issue have yet emerged, but the general emphasis is on the rate of growth of the labour force, the production of national income saved and invested and the rate of technological improvements, as being the main determinants. The economic theories of growth have been rather abstract and formalistic and much more attention has been paid to the various growth models than to their empirical and practical relevance, which is fairly low. We must remember that our concern is with economic growth that arises out of the fact that the greater the rate of growth of the economy, the greater, other things being equal, the increase in the level of well-being. Hence, comparisons between growth rates of the Western and other countries have given the impression that the level of well-being does not increase as rapidly as it might be, which has in turn led to the search for new policies to stimulate growth.

This is basically due to the lack of the percolation or the trickle-down effect. The benefits of economic growth fail to reach the masses because of this failure. Hence, there has occurred a shift from macro to micro strategies ie, from economic growth to income distribution issues. During earlier times (especially during the fifties), the emphasis was initially on macro issues linked with economic growth. In other words, the policy was in terms of emphasising growth but weighing the growth performance by the distributional record. This strategy was subject to the percolation or trickle-down effect, according to which countries with moderate to rapid rates of aggregate economic growth would succeed in upgrading the economic condition of significant numbers of their people. But in later years, there was a shift from micro to macro strategies in terms of emphasising changing poverty, inequality and unemployment as the principal indicators of development.

In essence, countries had initially what we term as growth mania. In other words, it was greatly felt that once the economy had a high rate of growth, it will surely trickle-down to the masses. But, growth mania is shown to be a myth. The earlier outlook (from macro to micro) has miserably failed now and the countries have shifted from growth to distribution. Growth mania has now lost its charms and countries now focus on micro development through area-specific and target-specific programmes as has happened in India over the years.

Economic growth was no unheard of before the 20th century. The 18th century economists had a lively awareness of the opportunities for economic expansion through innovation, through trade and through division of labour and they started worrying about what is termed as the growth index, which is like a national flag or a national airline. A national plan for economic growth was then deemed an essential item in the paraphernalia of every new nation state. It was felt that to be with growth is manifestly to be with it and like speed itself, the faster the better.

But this thesis was inverted in the late fifties and most of the nations shifted from the first strategy to the second one, emphasising distributional issue more than growth strategies.

The growth mania has now become a myth and rightly so. If the countries are interested to achieve a higher rate of economic growth and wish to give it top priority they should fully eliminate the non-friendly barriers that provide bottlenecks to the trickle-down effect so that the benefits (both direct and indirect) reach the masses. But it is a fact and a truth that it is not possible to fully eliminate these non-friendly barriers (essentially because of the role of the so-called political entrepreneurs and their supporters). And, hence, countries should focus on distributional issues and through them achieve a higher rate of growth. We must not, therefore, rush for growth, but we should always rush for distributional issues. This step would by itself push growth. Such a strategy would lead to the overall well-being of the whole nation.

In the context of India, let me add that, apart from focusing on the distributional issues as we have said above, the concerned authorities should find effective ways and means to consolidate huge amount of money that floats continuously in the black market and also is continuously generated through rent-seeking and directly unproductive profit-seeking activities by the so-called political entrepreneurs and their supporters (in the terminology of the ‘New Political Economy’) who involve in all kinds of nefarious activities for their self- interests. Once all this is consolidated, India would soon emerge as the super power.

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