written by Matt Andrews
A lot of people ask me how governments should support economic growth in the period ‘After Coronavirus’. It is a vital question that I wrestle with daily in preparing for the forthcoming Leading Economic Growth Online executive education program (which I teach with my amazing colleague, Ricardo Hausmann). Here are some of my personal thoughts on the issue.
1. I believe we must focus on future growth, even if it seems misplaced in the current crisis
At times in the last few weeks I have found myself asking if I am a little tone deaf focusing on how governments should be supporting growth tomorrow when many people are dying, starving or falling into deep poverty today. Then I remember that economic growth is actually key to helping those who are suffering today have better lives in the future. As my colleague Dani Rodrik wrote in One Economics, Many Recipes, ‘Historically nothing has worked better than economic growth in enabling societies to improve the life chances of their members, including those at the very bottom.’ Dani’s comments echo studies that find many connections between growth, jobs, prosperity and well-being. I can’t see why these connections will matter less tomorrow than they did in the past, so we need to keep focusing on growth as a key to getting lots of other stuff right. To keep motivated in this work, I recommend that everyone focused on growth scour the literature to identify how growth does connect to other improvements in their country, city, or region.
2. We should focus on growth as a means, not an end
We who work on growth should consider growth as a means to various ends, not an end in itself. Growth matters because it helps us achieve other ends we really care about—like ensuring our people have high quality work or access to education or better health care or (building on Dani Rodrik’s words) ‘improved life chances for our members’. When we develop our growth strategies it should be with these ends in mind, such that we promote the kind of growth that our society needs. This is really important because governments can foster growth in ways that undermine their real objectives. For example, I worked in a country where officials told me their biggest problem was that twenty-something university graduates were emigrating because they did not have good quality jobs (where the implied policy ‘end’ would be ‘more jobs for recent university graduates’ so that ‘college educated twenty-somethings emigrate less’). A consulting firm encouraged the country to pursue growth in tourism and mining, which it did, and which led to growth. Very few jobs in the newly expanded tourism and mining sectors went to the target population, however. As a result, the country’s growth did not achieve the needed objective or end. To ensure we focus our growth strategies on ends we really care about, I recommend developing an ends means growth chart that (i) lists the key problems we hope growth will help to solve; (ii) suggests a simple theory on how growth can help address each problem; and (iii) we use to guide our choice of which growth opportunities to pursue and which to pass on.
3. We should strive to better understand the last generation’s growth
I have worked with many government officials who were proud of their city, region or country’s growth since the 1990s, claiming that their policies had made their people more competitive than before. These officials often seem insulted when I ask if their growth should really be considered that remarkable. But they should not be insulted. Over 80% of the world’s countries grew in the last generation because the world saw rising economic tides that lifted the vast majority of economies (except during the 2008-2009 recession). This means that many places grew because the world was growing, not because governments were doing anything special, or lasting, or game changing. As a result—and reinforcing the argument—most places did not improve their relative position in the world economy during the period. I see this very clearly when I look at the comparative growth performance of countries between 1990 and 2016 in this paper and in the chart below, which shows the GDP per capita percentile position of 173 countries in 1990 (on the parallel axis) and 2016 (on the vertical axis). Over 70% of countries started and finished the period in very similar percentile positions, staying in their quintile ‘league’ throughout (where the five boxes you see in the graph show the five quintile leagues).
What this means is that while most places saw economic growth, the vast majority of high income countries or regions or cities stayed high income, the vast majority of upper middle income countries or regions or cities stayed upper middle income, the vast majority of lower middle income countries or regions or cities stayed lower middle income, and the vast majority of low income countries or regions or cities stayed low income. The net result is that even though most everyone grew in the last generation, the gap between the richer countries and less rich countries grew as well. Consider the following graph, which shows in the top half how high income to low income countries grew over this period (not all had upward sloping growth curves). It also shows, in the bottom half, how the gap between richer countries and less rich countries also grew (such that the average person in a low income country was $25,000 poorer than the average person in a high income country in 1990, but $43,000 poorer in 2016).
This observation matters for a number of reasons. First, it suggests that most cities, regions and countries grew and fell behind at the same time in the last generation—and should therefore not be too sanguine about their performance. They have not worked out the secret to growth. Second, it suggests that many cities, regions and countries probably grew more because of a rising global tide than their own game changing policies—and are probably bobbing up and down with that global tide. These economies are very likely to face negative growth if the global tide pulls back, which is worrying when we consider the worldwide growth crisis associated with Covid-19. In response to this, and to better guide our work, I recommend that everyone focused on growth be reflective and critical about their city, region or country’s experience in the last generation; asking seriously if it was really amazing government policies that fostered the growth or if it was just the rising world tide. You will need to seriously adjust your strategy if your economy has just been bobbing on the tide.
4. We must better understand how to foster game changing growth
My research does show that about 15 to 20 percent of the world’s economies experienced what I would call ‘game changing growth’—where they significantly improved their relative position in the world’s economic pecking order. Vietnam, for instance, improved from about the 85th percentile to about the 70th percentile; Mauritius improved from about the 48th percentile to about the 35th percentile. Most of the countries in this small but impressive group achieved their game changing growth by undergoing quite significant economic adaptation, developing vibrant service or production sectors that either did not exist at the start of the period or that grew rapidly over the period. In most of these cases, the economies have grown through diversification, becoming more resilient to economic shocks in the process because they now have a variety of sectors to hire and produce (and are not, therefore, dependent on one or other sector for survival). My colleague Ricardo Hausmann and his Growth Lab colleagues would say that these countries have worked out how to become more complex, which is the key to game changing growth. In response to such observation, policy professionals focused on growth should ask if their cities, regions or countries have worked out how to develop new sectors and become more complex and diversified over time. If there is no evidence of diversification, policy professionals should consider a serious shift in growth strategy.
5. We need to focus on building knowhow as the key to our growth strategy
I really do believe that cities, regions and countries achieve game changing growth—that improves well-being and resilience—by developing new sectors and becoming more complex and diversified over time. But how do you do this? The answer, again from Ricardo Hausmann and the Growth Lab, is to build knowhow. Hausmann likens economic development to a game of Scrabble, where more diversified economies produce many different kinds of words (or products and services), including long words with hard-to-find letters (complex products and services), because they have lots of letters (capabilities, built on knowhow). So, the key to growth is building knowhow in our economies—where knowhow is what our people, cumulatively, know-how to do. There are many ways to build knowhow; getting our people to connect in new ways, ask questions about how they do things and how they could do things differently, experiment with ideas and constantly stop to examine what they learn, etc. The approach is all about having your own people learn how-to-do things in new ways. It is a different approach to the common growth strategies I see: it is bottom-up, not top down, for instance, and centered on your own people asking questions, trying things out, and learning; not outsiders providing ready-made solutions that they have devised. I believe that economies with more localized knowhow are not only ore diversified but also more adaptive and resilient, and I believe that we are in an age where adaptation and resilience will be essential to fostering growth that addresses the ends we most care about. Let me ask you to reflect on your past growth strategies: have they actively focused on building knowhow in your economy? If not, I strongly advise that you shift your approach. Knowhow is key.
6. We should more explicitly consider the morality of our growth strategies
My final thought—for now—about how to think about growth in the period after coronavirus, centers on the importance of morality. I believe that those of us who think about growth have not been as thoughtful as we could and should have been about the way growth policies impact society and our world and the many values we often—on our best days—claim to own. With this in mind, I have been reading and re-reading Benjamin Friedman’s Moral Consequences of Economic Growth . He writes, “We are … increasingly aware that economic development [or growth] often brings undesirable side effects, like damage to the environment or the homogenization of what used to be distinctive cultures … [and we] therefore think of economic growth in terms of material considerations versus moral ones: Do we have the right to burden future generations, or even other species, for our own material advantage? Will the emphasis we place on growth, or the actions we take to achieve it, compromise our moral integrity?” Friedman continues: “I believe this thinking [about the morality of growth] is seriously, in some circumstances dangerously, incomplete. The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political and, ultimately, the moral character of a people.” In light of Friedman’s thoughts, I personally do not think we paid enough attention to the morality of growth with inequality in the last generation, instead accepting far too easily that there are winners and losers in the growth process (and not, as a result, doing enough to really ensure that no one falls behind). I do not think we paid enough attention to the value of building long term social and economic resilience instead of just short term growth and consumer-driven expansion. I do not think we paid enough attention to the values associated with investing in health and education systems instead of just promoting profits through health and education products. I do not think we paid enough attention to the importance of preserving our environment or local communities, choosing instead (often passively) to ramp up activities that harm these important natural and social assets. I believe that policy professionals focused on growth should be more attentive to the way growth—which we value—affects other things that we often say we value as well. I like the idea of using Mark Moore’s public value account to keep an eye on these effects. Described here, the public value account simply calls us to a more active awareness of the costs and benefits associated with strategies that promote growth. It is important that we have such an awareness or else we might find our growth strategies exert too heavy a public value cost than anyone might intend.
So, in conclusion, I think policy professionals facing the after-Coronavirus period should:
- focus on future growth, even if it seems misplaced in the current crisis
- focus on growth as a means, not an end
- strive to better understand the last generation’s growth
- better understand how to foster game changing growth
- focus on building knowhow as the key to any growth strategy
- more explicitly consider the morality of all growth strategies.
I wonder what you think?