People's Democracy

 The Nonsense Of GDP Growth

 S K Mishra

NEGATING the empirical evidence and theoretical wisdom of the 1950s and 1960s, it has now become fashionable to emphasise GDP growth. India’s Tenth Plan fixed the target of 8 per cent per annum growth during 2002-07, while actual growth was just 4.4 per cent in 2002-03. A US based management guru, C K Prahalad, has recently marketed the possibility of 10-15 per cent per annum growth in coming years. The mainstream economists in both India and abroad are busy with their questionable econometric and statistical exercises to prove that this mythical GDP growth rate is realisable if neo-liberal ‘reforms’ are pushed vigorously, and that with the realisation of this high growth rate, the mass of the people will automatically gain as jobs will be created and poverty will vanish.

FALSIFYING THE EVIDENCE

This, however, is not true. In fact, present day GDP growth is jobless. Quite often, instead of creating jobs, it results in job loss, which leads to accentuation of poverty. In India, this all is happening ever since the rigorous pursuit of neo-liberal ‘reforms’ began in the early 1990s. However, protagonists of neo-liberal ‘reforms,’ engaged in the international financial institutions funded research at so-called research organisations and other academic institutions, are making frantic efforts to convince the people that India’s GDP growth, accelerated by the neo-liberal ‘reforms,’ is egalitarian in the sense that its gains have trickled down and have reached the common people. This, in their opinion, is reflected in a “significant reduction” in the incidence of poverty.

Thus it seems that these so-called academics are determined to prove Josef Stiglitz right who wrote in his book Globalisation and Its Discontents, “The French intellectual Pierre Bourdieu has written about the need for politicians to behave more like scholars and to engage in scientific debate based on hard facts and evidence. Regrettably, the opposite happens too often, when academics involved in making policy recommendations become politicised and start to bend the evidence to fit the ideas of those in charge.”

We, however, totally reject this motivated research based on dubious statistical methods and doubtful data. Nonetheless, we consider it necessary to explain why high GDP growth is, even if it materialises, not sufficient for the well being of the common people.

Modern growth processes leave large segments of the population completely untouched. Former World Bank president Robert McNamara had estimated that about 40 per cent of the developing world’s population did not benefit at all from the economic growth during the 1950s and 1960s. Even other studies of the 1960s did not support the hypothesis that economic growth raises the share of income of the poorest segments of the population. On the contrary, their results invariably suggested that economic dynamism at low levels of development worked to the relative disadvantage of lower income groups. Irma Adelman and Cynthia Taft Morris revealed in their study that the poorest 60 per cent group benefited only when there were broad based efforts to improve the economy’s human resources. Most empirical studies of that period suggest that in a developing country obsession with economic growth is not correct. On the contrary, the policies of the state in these countries should be oriented towards poverty alleviation, employment generation, satisfying basic needs of the people and reduction in income inequality.

INEGALITARIAN PROCESS

Growth was seen as an inegalitarian process by Marx. Several development economists have also reached the conclusion that, given the institutional set-up of non-socialist third world economies, one cannot conceive of any other form of development except the enclave type which inevitably accentuates income inequalities and incidence of poverty.

It has been observed that incomes in the traditional sector show a tendency to decline as a consequence of the development of the enclaves. In India, GDP growth was 5.58 per cent per annum during 1991-2001. When we examine sectoral rates, we find that agricultural growth rate was as low as 2.85 per cent per annum, manufacturing growth was 4.01 per cent per annum and services sector grew at 7.41 per cent per annum. Since poor households in India depend mostly on low growth activities such as agriculture and industries for their subsistence, it is no surprise that this 5.6 per cent per annum GDP growth has completely bypassed them. Benefits of 7.4 per cent per annum growth in the services sector have remained concentrated with the elite.

The poor have suffered on account of enclave type economic growth due to one or more of the following reasons.

• The developed enclave acquires power to exploit the traditional sectors. This has actually happened in different parts of the country where people have been driven off their land. Further, urban elites have turned the terms of trade against the countryside. 

• Products of the enclaves have been destroying traditional small-scale industries and handicrafts. There are many more examples: household equipment has been destroying domestic services and office machinery is destroying clerical jobs, and the green revolution has ruined small and marginal farmers as they cannot use bio-chemical inputs.

• The development of the enclave attracts capital, enterprise and talent from other sectors, resulting in the pauperisation of the latter.

• The wage level in the enclave is often so high that it destroys the employment in the traditional sector by raising the aspirations of workers in the latter.

• The development of the enclave induces excessive migration from the rural sector. Obviously, productive work does not exist for all of them in the enclave. Therefore, many migrants from the rural sector fail to get jobs. They swell the number of the unemployed and also contribute to urban slum formation.

THE HOAX OF TRICKLE DOWN

As far as the ‘trickle down effects’ of growth are concerned, they are not to be taken seriously. By falsifying data, the neo-liberalisers try to convince people that the benefits of high GDP growth ultimately reach all sections of the society.

In fact, nothing of the sort happens. Automatic trickle down is most unlikely because in the upper class dominated society of India there is unequal access to the opportunists of producing or obtaining the income from incremental GDP. It is the richer groups which have access to all the opportunities and appropriate the increased GDP, which leads to still sharper inequalities in income distribution.

There is no merit in income inequality, as the neo-liberalisers attribute to it. Inequality of income distribution is not necessarily needed to promote savings and investment. In fact, the doctrine that unequal distribution of income is helpful to growth because only the rich save is a travesty of the truth. Even if it is agreed that income inequality results in larger savings and investment, leading to higher GDP growth, these developments may solidify production structure in the direction of greater inequality. Once a production structure conforming to the needs of unequal distribution and a domestic market reserved for the elites have been developed, the process becomes irreversible. Therefore, in India, given its high rate of population growth, increasingly capital intensive technology, its limited resources and pursuit of neo-liberal economic policies, trickle down is most unlikely in the normal context of purely GDP growth.

IGNORING EMPLOYMENT

Widespread unemployment exists in India along with appallingly low level of production. India has been fighting hard for some time past on two fronts, viz, production and employment, and in doing so has discovered that a success on production front does not necessarily imply success on employment front also. For a country, particularly if it is underdeveloped, the objectives of raising the output level and employment generation are equally important. An ideal situation for it would be that both production and employment increase simultaneously. But often such a thing does not happen and a conflict develops between these two objectives. In India, the policy makers are now aware of this conflict and they accord overriding priority to GDP growth while employment generation receives merely ritualistic support.

The problem arsing from the incompatibility between the objectives of raising the output levels and employment generation is really very serious and if India earnestly wishes to overcome it, it has no choice except to discover labour-absorbing techniques particularly suited to its requirements. Until India manages to do that, it will have to make a difficult choice between the two more or less equally important objectives. At present, the government’s obsession with raising the GDP growth rate and its attempt to encourage workers’ retrenchment in the private and public sectors shows its preference for growth. At a point of time when employment elasticity has steeply fallen to 0.16, according to the Planning Commission’s own admission, there is a strong case for according overriding priority to employment. Obsession with GDP growth at this juncture is both irrational and inegalitarian, as it is in conflict with elimination of unemployment.

WHY PRIORITY TO EMPLOYMENT

Whenever a conflict between growth and employment is unavoidable and optimisation of one results in a setback to the other, employment is to be given priority over output due to the following reasons.

First, the life of unemployed persons in India, particularly of these belonging to the lower strata of the society, is very miserable. Keeping the pitiable condition of the unemployed in view, the need for social security measures for them is felt in all egalitarian societies. However, there is no social security arrangement for the unemployed in this country. Unemployed persons in India either survive on the support which they sometimes get from other members of the family or they fall back upon their meagre savings. If nothing of the sort is possible, they borrow from various sources at exorbitant rates of interest. Once fallen in a debt trap, they carry the burden of debt for a long time, even after getting employment. Therefore, employment generation in Indian conditions must receive overriding priority.

There is a second reason why employment generation in this country deserves far greater attention than it has received so far. Unemployment is a curse to a person. It has an extremely demoralising effect on the unemployed. A person loses self-respect if her or his unemployment is a prolonged one. It is to be recognised that the preservation of self-respect is worth sacrificing some production. In fact, of all the evils worklessness is the worst. Thus unemployment is not to be seen as an evil merely because it results in a lower national output but also because it causes frustration and moral degradation in course of time, which ultimately vitiates the whole atmosphere of the society. Thus it is worth losing some production for eliminating this evil.