Stifling growth with good intentions

Former World Bank President McNamaraPoliticians, particularly those dealing with public money, are easily divided into two groups - the do-gooders and the do-nothings.The do-gooders believe that most social problems - like poverty, for instance - will go away if, you throw enough rupees or dollars at them. The do-nothings belong to the hard school of laissez-faire and believe in the divine principle of self-adjustment by which things - and problems - sort themselves out in the long run if left severely to themselves.Robert McNamara, World Bank president until last month, is obviously a do-gooder. Like most men of his generation he has evidently been influenced by John Kenneth Galbraith's Affluent Society, which made or popularised one essential point, namely, that the problem of wealth is not how to create it but how to use it. Galbraith was also responsible for the notion that, affluence can be used to abolish poverty - a notion that forms the basis for McNamara's global anti-poverty programme. McNamara has been talking about poverty in the same tone in which most bishops talk about sin, though he does not seem to have realised that the task of abolishing poverty by throwing World Bank dollars at the poor is almost as thankless - and almost certainly as irrelevant - as trying to abolish sin through sermons from candle-lit pulpits.Treacherous Statistics: Most do-gooders think that the world is divided neatly between the haves and the have-nots, or according to the current fashionable nomenclature, north and south. Statistical comparisons between countries with widely varied economic structures are notoriously treacherous, but contrary to popular belief they do not support the idea of a growing north-south gap. As the chart shows, growth rates of developing countries have always exceeded those of the industrial nations over the last 20 years, although there are variations at individual country levels. During the 13-year period 1960-1973, that is, before the oil price shock, the 'south' grew at 6.1 percent annually while the growth rate of the 'north' was 5.0 per cent. During 1973-75, the growth rate in the north came down sharply to 0.1 per cent while the south carried on gamely with a rate of 4.1 per cent. During 1975-79, the rich countries recovered their breath and the growth rate climbed to 4.4 per cent but the poor countries did much better and totted up a rate of 5.7 per cent. In 1979-81, for which only provisional estimates are available, the growth rate in the south was thrice as high as in the north -4.3 per cent against 1.4 per cent.However, the do-gooders continue to maintain that these rates do nothing to help the poor countries catch up with the north. Their argument is that the gap is so large that the south has to grow at rates nearing something like to 20 to 30 per cent a year to enable them to reach anywhere nearer the levels obtaining among the rich nations.But is it really so? Firstly, as the World Bank's latest Development Report released last month indicates, international comparisons on the basis of exchange rates are misleading and give a totally distorted picture of the actual state of affairs. Exchange rates do not necessarily reflect the purchasing power of currencies, because they exclude that (often quite large) portion of gross domestic product (GDP) which does not enter international trade. A banana is after all a banana but because its price varies from about 25 paise in New Delhi to Rs 2 in Amsterdam, it does not mean that the Dutchman's consumption of bananas is eight times that of the Indian, though both eat just one banana. The Bank has now made comparisons on the basis of purchasing power - and not exchange rates - and the results are striking. The net effect is to increase the estimates of gross national product (GNP) per person by substantial amounts, particularly in the poorer countries. On this basis, the average GNP per person in low-income countries is not US $739Normal Pattern: If instead of taking the low-income countries, we take the entire lot of developing countries, the gap is even narrower, reduced from the earlier 12:1 to 5:1 (These are actually World Bank estimates and are given in its latest Development Report). A gap of 5:1 or even 10:1 is not such a monumental affair that it is made out to be. This is a normal pattern of income distribution in most countries. For instance, according to the Bank itself, the top 20 per cent of households in India are seven times better off than the bottom 20 per cent, making the gap 7:1. In Sri Lanka, the figure is 6:1; in Indonesia, 7:1; in Spain, 7:1; again; in Britain, 5.1; in the US, 9: in Canada, 8.1 and in West Germany; with a per capita income 63 times that of India, the gap is exactly the same as in India, namely, 7:1.So the poverty gap for the world as a whole is no different from that in individual countries and is remarkably the same in most countries, in Germany as well as in India, in Canada as well as in Indonesia though in per capita GNP terms these countries are at the two ends of the income spectrum. What is more, the pattern has not altered much over the years and has remained remarkably constant. The growing poverty gap is essentially a do-gooders rhetoric and has little basis in hard economic fact. The hard economic fact in life is that there are poor people and rich people in all countries, and no matter what the governments do and do not and also no matter how rich or poor the countries are in overall GNP terms, when the rich become richer, the poor do not get poorer but maintain more or less the same relative distance from the rich.If this is the situation, the so-called transfer of resources from the rich to the poor as a means of bridging the gap would seem to be either irrelevant or ineffective. No one, for instance, would argue that there has been no transfer of resources within the American society, perhaps the most dynamic and mobile society in the world, where yesterday's refugees from the ghettos of Europe routinely climb the social and financial ladder and make the millionaires' list. Also, in the same routine fashion, yesterday's millionaires hit the dust and disappear into limbo. But such a churning up of resources-and people-has not affected America's income distribution pattern. The notion that a transfer of resources leads to the narrowing of the richpoor gap is a myth. What has not happened within a country cannot possibly take place in the world,Ineffective Instruments: In any case, governments and international institutions- like the World Bank are perhaps the least suitable instruments for such a transfer. According to the figures provided by the Bank itself, there is virtually no correlation between increase in aid (or external capital flow on government account) and increase decrease in growth rate. Between 1970 and 1979, aid to Pakistan increased by 80 per cent but this did not prevent its growth rate from slumping by 33 per cent (from 6.7 per cent to 4.5 per cent). In Argentina, there was a six-fold increase in aid but the growth rate was virtually halved from 4.2 per cent to 2.5 per cent. In Israel, the aid flow was trebled and the growth rate was down by 40 per cent. In Bangladesh, a tiny country compared to India, the current aid volume is half that of India and probably 10 times that before it became free but its growth rate is actually less than what it was in the 1960s. In Ghana, the picture is even more eloquent-and disturbing: The aid volume has trebled in the last nine years but the rate of growth has actually turned negative-the country is eating up its resources leaving virtually nothing for development. And in Portugal, aid has increased 50-fold (from-nearly Rs 16 crore in 1970 to Rs 800 crore in 1979) and how has it affected the Portuguese economy? The growth rate is down from 6.2 per cent to 4.5 per cent, a 30 per cent decline which must be mocking the aid-givers.There is, however, one external factor, which seems to make a good deal of difference to growth rates-private capital inflow from abroad. Wherever this is sizeable in relation, to capital receipts on government account, there is a perceptible hike in growth rates, though this is not a universal rule. In Egypt, for instance, there was considerable increase in aid but also a substantial hike in private investment which accounted for more than 50 per cent of aid in 1979. The growth rate of GDP also went up by 80 per cent, from 4.2 per cent to 7.6 per cent. In Malaysia the increase in foreign aid was accompanied by an even more rapid hike in private investment, and the growth rate improved by 25 per cent. Similarly in Brazil, there was a five-fold increase in foreign private investment (along with a 10-fold hike in aid) and the growth rate went up by more than 60 per cent. There is, of course, not enough evidence to prove that it was the private investment that made all the difference, but the correlation is quite strong and makes one wonder whether things in India would not have improved substantially had not foreign investment been kept at bay.Anti-business: Unfortunately, there are strong anti-business lobbies in most developing countries, not just against foreign business but domestic business as well. These lobbies welcome aid on government account but are chary of business or commercial transactions, whether on official or private account. The recent outbrust of criticism against New Delhi's move for a bridging loan from the International Monetary Fund (IMF) as also the purchase of foodgrains from the US is a case in point. Both are business transactions, the IMF loan being a perfectly regular one and precisely the kind for which IMF was created in the first place. Compare this reaction to the kind of welcome that normally greets the annual exercise in Paris with the Aid-India Consortium. The official delegation that returns from its annual begging expedition holds a press conference to announce its success, tinged perhaps with a slight regret that the loan amount couldn't be bigger. The negotiations for the import of foodgrains from the US against Public Law 480 funds in the '60s were also accompanied by similar gestures of jubilation, for the foodgrains were gifted by Washington and not purchased against hard cash. But turn aid into trade and there is an immediate outcry that the country's foreign exchange is being frittered away or the nation is being subjected to political blackmail, if not worse. The anti-business lobby is strongly entrenched in the bureaucracy-for bureaucrats are the main beneficiaries of government to government bonanza-as well as in the wilder reaches of leftist academia.In the final analysis, it is not aid but trade that will ultimately make all the difference between growth and stagnation, between perpetual poverty and decent living standards. The countries which have done really well and escaped the poverty trap are precisely those which have been able to strengthen the business element in their economy, either in the form of increased exports or bigger foreign business involvement. Take tiny South Korea with a population no more than a third of that of Uttar Pradesh: it has maintained an average export growth rate of about 30 per cent per year over the last two decades and last year had a foreign trade equal to a third of India's national income. India and South Korea were more or less in the same income league immediately after World War II. Within a generation, while India continues to languish at the bottom of the league, Korea has pushed way ahead with a per capita GNP that is eight times India's. South Korea does not fight shy of foreigners-neither of IMF nor of multinationals-and can take care of both. On, the other hand, Indians believe that everyone who knocks at their door is a big bad wolf to be avoided at all costs. The result- India is a country in which only beggars are honoured and which has a permanent wolf at the door.Published By: AtMigration Published On: Nov 12, 2013 08:59 IST--- ENDS ---

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Stifling growth with good intentions

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