By Rafiq Raji, PhD
Twitter: @DrRafiqRaji, @macroafrica
“Growth is hard to measure. It is even harder to know what drives it, and therefore to make policy to make it happen” (Banerjee & Duflo, 2019).
The obsession of the rich world’s economists with growth is understandable: growth has been anaemic in those parts for decades. And even with all sorts of unorthodox interventions, from quantitative easing to yield curve control, the needle has barely moved.
The conventional wisdom is that technological innovation and population growth should engender economic growth. While the latter has almost certainly been slowing – negative even – in the rich world over time, the same cannot be said of the former.
Still, the internet, artificial intelligence and many other productivity-enhancing technological feats of our time have surprisingly not been as revolutionary for growth like better and more education, electricity, the internal combustion engine, and others, were in the past.
There is a school of thought that believes trying to determine why this is the case is needless. This is because the answer may be more a child of time than effort; a sentiment echoed by Banerjee & Duflo: “Mostly, what is clear is that we don’t know and have no way to find out other than by waiting”.
Thus, as the duo also reckon, “the most important question we can usefully answer in rich countries [at this time] is not how to make them grow even richer, but how to improve the quality of life of their average citizen.”
African countries are not in the same boat with their rich counterparts in this regard; albeit 1-2% growth by its two largest economies in recent years makes you wonder aloud about that a little bit. Still, the authors agree: “It is in the developing world, where growth is sometimes held back by an egregious abuse of economic logic, that we may have something useful to say, though, as we will see, even that is very limited.”
No set path to growth
Economic growth is driven by skilled labour and capital; both of which are abundant in rich countries but scarce for the latter or imbalanced in poor countries. Adjustments to these variables can still result in significant shifts in growth and development for developing countries. For rich ones, however, what would be similarly impacting would have to be the kind of technological progress that makes already abundant skilled labour and capital even more productive. And while technological innovation is seemingly abundant, it has surprisingly not been as growth-enhancing as imagined. There are arguments about whether this is the case because we are measuring growth wrongly. That is not our focus here, however.
Industrial policy was hitherto frowned upon by conventional economists and policymakers. And yet East Asia’s success on the back of it is hard to ignore. This is a point Reda Cherif and Fuad Hasanov of the International Monetary Fund (IMF) make in their March 2019 working paper aptly titled “The Return of the Policy That shall not be named: Principles of industrial policy”.
They highlight how “True Industrial Policy” or “Technology and Innovation Policy” is a formula for growth when it abides by the following three key principles: (i) state intervention to fix market failures (ii) export orientation and (iii) the pursuit of fierce domestic and international competition.
I do not agree or disagree with their thesis. Instead, my goal is to show how what may be considered crude, ill-informed, or voodoo economics at the outset could later be celebrated by the same ex ante detractors. More fundamentally, it is evidence, like Banerjee & Duflo suggest, and as has been well-known in academic circles for ages, there is no one strategy for growth.
Banerjee & Duflo have a view on the East Asian example: “Those who herald the experience of the East Asian countries to prove the virtue of one approach or the other are dreaming; there is no way to prove any such thing. The bottomline is that, much as in rich countries, we have no accepted recipe for how to make growth happen in poor countries.”
The appropriate lessons from all these is not so much that because some form of state-driven economic development is now acceptable to the IMF, African countries should suddenly now see this as appropriate for their own development.
Instead, the lesson is that an economy must decide for itself what it needs to do to achieve sustainable development. Ponder this for a minute. Had the Asian countries now being celebrated taken the advice of the IMF and others to liberalise their economies and jettison state intervention, would they be the ‘miracle’ they are today? It is a rhetorical question.
As Banerjee & Duflo assert, “the bottomline is that despite the best efforts of generations of economists, the deep mechanisms of persistent eocnomic growth remain elusive.” Thus, my advice to African countries is to think independently about their respective situations and doggedly pursue the strategies they decide on.