By Jaithirth Rao
For years now, I have been arguing with anyone who cared to listen that what we needed was a 10-12% GDP growth rate, and for this growth to be uninterrupted for 10-15 years. Given our low levels of economic well-being, this was the only way for us to provide a modicum of prosperity to our citizens in a meaningful timeframe. But of course, we never got even close, and given today’s hostile global environment, we seem quite happy with a 6% growth rate. Oh, how the aspiring have fallen! Even I am willing to go along with being content with this level, which smacks of extreme modesty and even a little bit of despair. Why the change?
The change has arisen as an indirect consequence of the pandemic. Remember the time when we were all great supporters of just-in-time inventory management? We cut manufacturing costs to the bone. Everything was about being hyper-efficient. That was the Chinese model. And many of us were advocates of the same for India. But let us be honest. We forgot something. We forgot the underlying risks associated with this pursuit of efficiency. It took a black swan pandemic, which operated several standard deviations away from the mean, to bring our attention back to the fact that even as we tried to maximise mean values, we were ignoring the variance, especially the second moments and beyond, when we abandon even temporarily our obsession with normal distributions.
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Extreme division of labour and interconnected supply-chains can lead to astonishing economic performance; but when things go wrong, the much-vaunted performance can go haywire. It was okay for us to transfer all API production to China and stay focused on the manufacture of final drugs. After all, this drove down costs for everyone. Fukushima should have warned us about disruptions in sub-assemblies and assemblies. But we shrugged off the data that stared at us. We just could not do the same with Covid, which launched economic concerns, and which coincided with a time of heightened political differences.
Many years ago, one of my teachers, professor Deldre McCloskey at Chicago had warned us not to be seduced by the World Bank’s simplistic advice to Bangladeshi peasants to create larger, and presumably more efficient, farms. McCloskey argued that the Bangladeshi farmer deliberately kept one acre here and another half-acre far way and yet another third of an acre some place else. The farmer was trying to diversify her assets in order to avoid being hit by floods all at one place. This strategy did result in lower farm yields and hence was seen by “experts” as “inefficient”. But it did protect against black swan floods, which in rural Bangladesh were not that rare after all.
There is another major risk-based argument against pursuing extremely high growth rates. It is oftentimes ignored. Let us just consider our own country. If India has a growth rate of 6%, it is possible. that Karnataka will grow at 9% and West Bengal at 4%. The differential between the two is five percentage points. If the country grows at 12%, it is possible that the two states now grow at 15% and 10%, again maintaining the 5-ppt differential. So, there should be no incremental concern, right? Wrong! The fact is that in the second case, if the rates are maintained for ten years, the effect of compounding on the level of base wealth in the two states will end up being completely out of whack. The two states will end up virtually on different planets. And the resulting inter-regional tensions would almost certainly tear the country apart. We do know that one of the big contributory factors to the American Civil War was the growth rate differentials between the North and the South persisting for decades. A 190 years after its formation, the two regions of Belgium are still at each other’s throats—in some measure, on account of wealth differences.
A major reason for Pakistan splitting up in 1971 was the differentials in growth rates and wealth accumulation. And wealth differences can and do exacerbate cultural divides. I can already see in our country, clever-sounding persons in the South and West looking down on North India, not just on account of the prevailing poverty, but as being culturally “backward”, whatever that may mean. And all this is happening while we are chugging along at 6% growth rates—12% growth rates may just lead to an incendiary falling apart of states and regions.
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One can ask the question as to why we should be against some regions forging ahead of others. The answer lies in understanding that while some risks are manageable, others are not. A civil war affects all parties. Sri Lanka may take decades, even a century to return to pre-Civil War stability and prosperity levels.
The alienation of large parts of the midwestern American rustbelt from higher-growth bicoastal enclaves is proving destructive even in affluent America. The Brexit referendum vote in Britain demonstrates the hazards of geographic divisions between the London-centered south and the Midlands. Let us not forget decades of extreme differences in growth rates here. When growth rates are modest, the emerging wealth differentials, even with the compounding effect can be managed by sober societies and political systems.
And by the way, 6% is not a shabby growth rate. A 12% growth rate might just be too risky. Let us always remember the “variance” part of all our mean-variance models.
Net-net, here is a votary of unabashed, over-exuberant GDP growth acknowledging that a little modesty is not out of place. And I say this not as an anti-growth, woke Luddite, but as one who has been forced to revisit the underlying convenient habit of maximising a single variable without paying due consideration to the distribution of risks.
The writer is founder and non-executive director, VBHC
