Nature, structure of economic growth

Economic growth, commonly measured by an increase in the real income per capita of a country, is a complex phenomenon. Its complexity stems from its multiple dimensions related to multifarious determinants, diverse sources and numerous uses. Different countries have achieved different growth rates in different time periods using different growth strategies.
Thus the diagnosis of cross-country and time-related differences in economic performance involves the study of growth strategies adopted by various countries over time. In other words, how much growth is achieved by a country for how long, using which strategies, emerging from which sectors and is shared by whom - are all inter-related questions which have to be studied simultaneously for diagnosing the nature and structure of economic growth.
A review of literature on economic growth along with the growth experiences across the globe would suggest that within the dynamic framework, growth performance of a country can be analysed using ten criteria of assessment namely the criteria of sustainability, balance, optimality, equity, self-sufficiency, diversification, externality, efficiency, stability and structuralism.
A brief discussion of these criteria and their applicability is taken up with a view to understanding the growth process across countries in a holistic manner. Taking the criterion of sustainability, at the first instance, economic growth experienced by different countries can be classified into two categories - the sustainable and the unsustainable.
The former can be identified as the one, which is self-sustaining, it is environment-friendly and is based on 'normal' use of natural and mineral resources of a country. The unsustainable growth, on the other hand, is not only erratic, it is environmentally degrading and is associated with 'abnormal' exploitation of natural wealth such as forests, rivers and minerals as well as the man-made infrastructure.
When applied to the economic growth of Pakistan, it does not meet the sustainability criteria as this growth is accompanied with unsustainable pressures of population and urbanisation, rapid deforestation and depreciation of physical infrastructure as well as the uncontrolled and fast increasing pollution of urban centers.
The application of the second criterion, namely the criterion of balance, helps in identifying whether economic growth experienced by a country is balanced or unbalanced. Economic growth is considered to be balanced when various regions comprising a country, its rural, urban and male, female populations or its major sectors such as agriculture and industry are 'evenly' and 'fairly' developed. The unbalanced growth has the opposite characteristics.
This is reflected in wide disparities in the levels of economic development - regions-wise, rural/urban-wise, gender-wise and sector-wise. When applied to the economic development of Pakistan, this criterion would establish that the economy of Pakistan continues to suffer from 'dualism' as certain regions, sub-sectors and segments of population remain grossly under-developed while other regions, sectors, and segments of population show the opposite picture.
The rural sectors and female population of Pakistan have not been brought into the mainstream of economic growth achieved since independence. According to the third criterion namely the criterion of optimality, it is imperative that the private and public sectors of an economy must be playing their optimal roles to generate synergies of partnership and to ensure the maximum level of employment and output given the factor endowment and human resource base of the country.
In the modern world, the doctrinaire adherence either to the Platonic-cum-Marxian type centralised communistic state or the Aristotelian-cum-Smithsonian type laissez faire economy has fairly waned.
At the same time, there is a general acceptance of economic planning as an essential tool of national development which is being used to realise the full potential and contribution of the private sector to economic growth. The state intervention is at present considered to be a 'sine qua non' for correcting a host of 'market failures' which are common and endemic both in the developed and the developing countries.
Given the resurgence of the philosophy of economic neo-liberalism, which sells under the new rubric of "Beyond Planning and Mercantilism", the fact remains that even in the most liberalised economies of world, economic planning either in the explicit form or in an implicit guise continues to determine numerous variables of the economy such as savings, investment, money supply, prices, exports, imports, exchange rate and GDP growth.
In case of Pakistan, both the public and the private sectors have played a sub-optimal role in economic development of the country and have commonly failed to help realise the full potential of the society. Whereas the public sector has been constrained by insufficient resources, inefficiencies, wastage and corruption, the private sector has suffered from inertia, lack of Keynesian "animal spirits" and excessive propensity for profiteering.
At the same time, a lack of vision and foresight has afflicted both the sectors for many decades with serious consequences for the process of economic growth. The criterion of equity, the fourth in our analysis, focuses on the distributional and welfare aspects of growth. If economic growth leads to greater skewness in income and wealth distribution and a large portion of the population finds itself further down in the scale of living standards, such growth would be classified as anti-poor.
The objective of economic growth should not be the "immiserization" of the masses rather an increase in their levels of sustenance should be the primary goal of development. For that reason, there has been widespread disillusionment with the "trickle-down" theory which stipulates that benefits of economic growth will automatically filter down to the poorest of the society.
Even the "trickle-down" effect of economic growth would be neutralised if the taxation system in place is regressive with the major share of the tax revenues being contributed by indirect taxes. Furthermore, if economic growth synchronises with lax monetary policy and high inflationary pressures, the poor sections of the society would suffer the most.
Hence the analysis of economic growth needs an integrated approach which takes into account the impact of fiscal, monetary and trade policies for assessing the overall implications of economic growth. For evaluating the long-run growth of a country, the fifth criterion ie the criterion of self-sufficiency is extremely relevant.
Self-sufficiency in the present context refers to the level of domestic resource mobilisation to finance the gross investment in the country which is the main determinant of economic growth. If a country continues to finance its private and public investment from the domestic and foreign loans, the resultant growth could be identified as the "borrowed growth".
A large number of developing countries for the last half a century have resorted to heavy dependence on external "aid" and are now badly caught in the "debt trap". Under such a predicament, these countries need to borrow more to service their earlier debts. At the same time, external borrowing brings into the country the 'borrowed technologies' and 'borrowed strategies'. As a consequence, the country quite often loses its autonomy in policy making.
The sixth criterion for assessing the growth process of a country is labelled as criterion of diversification. In a large number of developing countries in Asia and Africa, growth is critically dependent upon the production of one or two raw products such as rubber, cotton, jute, cocoa, coffee, tea etc. In these cases, deterioration of barter and income terms of trade is universal and these countries fail to mobilise sufficient resources for long-term development.
Interpreted in terms of Prebisch's centre-periphery topology, these mono-crop economies only serve as the source of raw materials for the industrial countries which form the 'centre' of the global economy. Despite registering a growth rate of about 5.0 percent per annum on an average basis during the last 60 years, Pakistan's economy is not sufficiently diversified and the dictum that the cotton output has cradled Pakistan's GDP growth, as one World Bank economist put it, holds even today.
Without diversification, Pakistan's economy would be confronted with serious challenges of globalisation which have emerged with the signing of Uruguay Round Agreements (URA) and are being implemented by World Trade Organisation (WTO) as a successor body to GATT 1947. The Uruguay Round consists of 14 agreements, 27 decisions and declarations, 8 understandings and one special arrangement namely the Trade Policy Review Mechanism (TPRM).
The Uruguay Round is affecting all sectors of the economy such as agriculture, manufacturing and services and only the diversified and technologically strong economies would be able to withstand the growing pressures of competition and liberalisation under the WTO. The seventh criterion for analysing the structure of economic growth is labelled as the criterion of "externality".
Under this criterion, the possible implications of economic growth on the external sector of the country concerned are diagnosed, which include the sub-components of balance of payments such as exports, imports, invisibles, amortisation etc. If growth in the real GDP leads to widening of trade deficit or the current account deficit, ultimately it puts pressures on the foreign exchange reserves of the country.
In this case, assets may be created through the process of economic growth but at the same the creation of external sector liabilities due to say excessive imports could drastically reduce the benefits of economic growth. The eighth criterion of growth assessment is that of efficiency. According to this criterion, different countries achieve different levels of output with the same level of factor inputs.
The efficiency factor is commonly measured by the parameters of Incremental Capital Output Ratio (ICOR) which indicates the additional investment required to generate one unit of output and labour-output ratio ie additional labour needed to create one unit of output.
A lower value of these parameters indicates the relative efficiency of factor use. The efficiencies of capital and labour can be estimated by using the well-known Cobb-Douglas type of production function. The main determinants of efficiency are the capacity utilisation, skills and training of the work force, the management techniques and the nature of technology.
Even though all these factors are important for enhancing efficiency of factors of production, the role of technology in augmenting the factor productivity is now considered as the most critical. In his well-known "Model of Exogenous Growth", Robert Solow has assigned a key role to technology as a determinant of efficiency, labour productivity and the rate of savings in an economy.
Dani Rodrik, Professor of International Political Economy at John F. Kennedy School of Government of Harvard University, in his recent research studies covering 140 countries has measured the relative shares of capital, labour and total factor productivity or (TFP) which is an indicator of the technology factor, and found out that in the industrial countries, a major contribution to economic growth comes from TFP rather than factor accumulation.
In countries like Germany, UK, France, Japan, Brazil, the contribution of TFP has varied from 25 percent to 50 percent. In case of Pakistan, the share of TFP has been almost negligible which suggests that Pakistan's growth performance has not synchronised with any technological advancement. The future growth strategies, therefore, must incorporate specific policy measures to increase the technology contents in growth and exports.
If the economic growth is volatile and excessively fluctuating, it renders policy making extremely difficult. Therefore, the criteria of stability, the ninth in our analysis, can be applied to assess the inherent variability of economic growth and its potential effects at the microeconomic and macroeconomic levels. Another aspect of stability is the relative fluctuations occurring in the price level and exchange rate levels in the wake of an economy which is growing at a variable rate.
In other words, if high growth rates occur along with high inflation rates or large depreciation of the domestic currency, the growth benefits could be neutralised. The tenth criterion for evaluating the quality of economic growth can be identified as the criterion of structuralism. The dynamic of economic growth requires that the structure of economies should be changing with lower shares for agriculture and with rising shares of the industrial sectors as well as services sector.
It has been historically experienced across the globe that as the countries move from the Traditional Stage to the Transitional Stage, Take-off, Drive to Maturity and to Mass Consumption as defined by W.W. Rostow, the economies undergo some structural changes reflected in a higher share of manufacturing and higher level of productivity etc. Therefore it is vital that economic growth should be followed by structural transformation because without such a transformation, the economy remains week and vulnerable to external shocks.
The conclusion of the discussion is that economic growth can be diagnosed in terms of quantitative as well as qualitative criteria. When evaluated against these criteria, Pakistan's historical growth experience does not appear to be favourable.
Despite reasonable growth rate achieved in the last six decades, the country continues to suffer from numerous gaps such as the poverty gap, human development gap, trade gap, saving-investment gap, technology gap and so on. It appears that it will still take years for Pakistan to enter the take-off stage.
(The writer is serving as Chief (WTO), Ministry of Industries and Production.)