Myth 4: All you need is growth

Myth 4: All you need is growth

Economic growth is the panacea of our age. All too often, the strategy for fighting poverty can be summed up in just three letters: GDP. But growth, while important, isn’t enough. Unless action is taken to ensure that the poor get their fair share, simply making the economic pie bigger is a terribly inefficient way of reducing poverty.

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Economic growth measures the increase in goods and services produced in a country over time. It’s seen as a panacea for all social ills, including most importantly, poverty. As long as you stoke growth and produce more , everything will get better.  

But let’s look at two examples which should force us to question this theory: Nigeria and Nepal. On paper, Nigeria is booming. Nigeria’s economy has increased almost 12 times since 2001 and is now the biggest economy in Africa. 

Conversely, Nepal appears to be doing less well. Growth, while reasonable, is nowhere near Nigerian levels, averaging 3.9 per cent a year since 2001. Nepal’s GDP, which measures the value of an economy, is just $1500 per capita, lagging far behind Nigeria’s figure of $2800.  

Despite all of this, Nepal has done much better than Nigeria at combating poverty. If we look at the (admittedly problematic) figure of people living on less than $1.25 a day, Nepal has halved poverty from 53 per cent in 2003 to 24 per cent in 2010  and inequality has fallen significantly over the same period.  Primary school enrolment has risen from 69 per cent to 98 per cent since 1999  

In Nigeria, however, growth has barely made a dent in poverty levels. Between 2004 and 2010, the country’s GDP grew fourfold  but it only reduced poverty by 1 per cent from 63 per cent to 62 per cent. 

Similar comparisons can also be made between rich countries. Despite struggling with very low growth for twenty years, Japan continues to be a world leader in living standards, with the world’s highest life expectancy. Conversely, the USA, which has far outgrown Japan over the last twenty years, languishes far lower down the rankings in education, health and crime.

So if growth is not the be-all and end-all, why is the world so obsessed with it?

Firstly, growth can be very important, especially to impoverished countries. In general, GDP growth is a necessary, if not sufficient, factor in reducing severe poverty. No developing country has made a significant dent in poverty without at least some growth. China cut poverty from 84 per cent in 1981 to just 6 per cent today, and huge economic growth was a key element.

But growth is certainly not sufficient, and unless a country is geared to sharing the benefits of growth fairly, it can actually make poverty worse. Today countries from Mozambique to Nigeria are witnessing growth plus rising poverty. The benefits of growth are being captured by a small global elite and the lives of those at the bottom of society are getting worse.  

Privatisation schemes, for instance, or projects which benefit the wealthiest, like building luxury hotels or shopping centres, do succeed in boosting GDP, but they fail to improve the lives of the majority because profits are repatriated to foreign shores and the proceeds fall into the hands of small elites. So when governments are advised to open their markets to multinationals who give vague promises of ‘investment’ and ‘economic growth’, they need to exercise a good deal of caution.

We’ve seen how growth based on dependence on oil or mineral extraction also usually fails to benefit society at large, as the benefit usually goes to multinational extractive firms unless the government tightly regulates and taxes, or controls production. For example, a Global Justice Now report into the Indonesian fossil fuel industry revealed that local people were gaining little from extractives while often losing their land and their livelihoods. 

In many countries, these growth-at-all-costs policies have often meant that most people see almost none of the proceeds of growth.

For example, between 1990 and 2001, for every $100 worth of growth in the global income per person, just $0.60 contributed to reducing poverty. More recently, in the first three  years of economic recovery since the 2008 financial crash, 95 per cent of the proceeds of growth in the USA went to the top 1 per cent. 

A similar story can be told about increasing productivity levels (GDP produced by hour worked). Workers have become increasingly productive over the last century, but since the 1980s free market revolution, wages have remained stagnant.

Take a look at this chart which shows productivity and median wages since 1945 in the USA. It shows that the proceeds of increased productivity (and by extension growth) have not been reflected in rising wages. No prizes for guessing where all of this extra wealth went (spoiler: the rich). Between 1978 and 2011, CEO pay rose 725 per cent while workers’ pay rose just 5.7 per cent.  

So while impoverished countries do need growth, it’s not enough on its own. Growth will only benefit the majority of people when it isn’t captured by uncontrolled corporations, but fairly shared throughout society.  If we could share out the proceeds of growth in the decades following World War II, why not now?