It is widely accepted that countries are poor because their economies did not manage to grow sufficiently. The converse is more accurate. Countries are poor because they shrink too often.
Comparing development in Taiwan with that in Venezuela (see graph below) illustrates the point. In 1950, the Gross Domestic Product (GDP) per person in Taiwan was only about an eighth of Venezuela’s. By 2016, the tables had turned and the fortunes of both countries had been reversed. By then, the GDP per person in Venezuela was only a third of that in Taiwan.
This has very little to do with Venezuela’s inability to grow. With substantial natural resources, Venezuela can create growth and has done so. Indeed, the average per person growth rate during the years that the country’s economy did expand was 4.13%.
Over the same period, Taiwan had a per person growth rate of 5.62% during its own growth years. But this 1.5% difference cannot explain the enormous difference in the two relative levels of prosperity in the two countries. So, if the difference cannot be explained by growth, perhaps it can be by the frequency with which the two economies shrank. Since the 1950s, the Taiwanese economy shrank only three times, while the Venezuelan economy shrank 31 times – almost every second year.
In the 1950s and 60s, many other low income countries in Latin America, sub-Saharan Africa and Asia were experiencing shrinking economies with roughly the same frequency (see graph below). From the 1970s to the 1990s, however, countries in Asia managed to reduce their incidences of shrinking while countries on the other two continents started to shrink more and more often. In the countries of sub-Saharan Africa, for instance, economies shrank, on average, every other year.
Again, in growth years, the Asian economies had an average annual growth rate per person that was only about 1-1.5% higher than that during growth years in Latin America and Africa. But the Asian economies overall made much greater gains over the period.
Again, this shows that all countries can create growth but only a few can reduce the number of years they experience shrinking. These patterns are also in line with what new research in economic history is showing: that it is the ability to reduce economic shrinking that explains why the West grew rich and the rest of the world did not.
The growth process very seldom is linear. True, especially in low income countries. Leading development economists have for some time complained that standard theories of economics might be relevant for understanding why economies grow, but are of little use for understanding why economies are different in terms of their ability to limit economic shrinking. Theories of economic growth performance are geared towards explaining accumulation, allocation and perhaps innovation – but not shrinking or negative growth.
Inclusive societies with a more equal distribution of income, assets and economic opportunities are more likely to experience sustained growth. Economies are probably also more stable and less prone to shrink if their governments are impartial, can stand free from the influence of vested interest groups, and deliver goods and services in a fair and efficient way.
Textbooks and policy agendas are filled with ideas about how to get growth going, but you’ll rarely read about what countries should do to avoid regular shrinking. We must learn from economies that have gone from frequent shrinkers to infrequent ones. If we know more about what those countries managed to accomplish, there are grounds for optimism in an economically less divided world.
Malaysia needs a more inclusive, impartial, merit-oriented strategy to lessen the impact of any downturn. Otherwise growth will alternate with negative growth leading to political and economic instability. But has this Government the gumption to change the framework?
Reference:
Poverty: what low-income countries need is not more economic growth, it’s less shrinking, Martin Andersson, Nov 28, 2019 (https://theconversation.com)
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