Why the ideas of Nobel prize winners Nordhaus and Romer are relevant for India

By: | Published: October 9, 2018 2:30 AM

Nordhaus’ work is more on the ‘negative spillover’ of emissions and damage to the environment as a result of growth. Romer’s is on the ‘positive spillovers’ of knowledge and technology.

The Nobel Prize for this year has been awarded to two economists in two different fields, but both relating their work with economic growth. (AP)

The Nobel Memorial Prize in Economic Sciences is now 50 years old and, interestingly, the average age of the recipient is 67 years. The age has ranged from 51-90 years, with Kenneth Arrow being the youngest to be bestowed with this honour. The Nobel Prize for this year has been awarded to two economists in two different fields, but both relating their work with economic growth. William Nordhaus, aged 77 years, has worked on climate change and economic growth, and Paul Romer (of the World Bank), aged 63 years, had worked on innovation and growth. Interestingly, the focus is on growth for both of them. Nordhaus’ work is more on the ‘negative spillover’ of emissions and damage to the environment as a result of growth. Romer’s work is on the ‘positive spillovers’ of knowledge and technology.

It is now accepted that in order to get higher standard of living it is necessary to have accelerated growth. This is the only way in which jobs can be created such that people are able to improve their standard of living. Here the two winners have different perspectives. Nordhaus says that as we strive to bring about high growth, we tend to damage our environment, which, in turn, comes back to haunt us and retard future growth. Therefore, all growth policies have to keep this in mind from the point of view of a long-term perspective, as a damaged environment will affect our lives. This has already been seen in terms of land, which gets less fertile due to excessive use of fertilisers and overgrazing, carbon emissions which affect health, aircraft which damage the ozone layer, erratic rainfall, ocean life, etc.

Nordhaus hence spoke of ‘DICE’ as the way forward—the ‘Dynamic Integrated model for Climate and Economy’. The obvious solution is a carbon tax, which is now quite popular in the world, whereby one discourages emissions or makes entities use better technologies that lower such emissions. The important thing is that there has to be government intervention here, as the market system will not ensure such a solution.

The problem here really is that countries, at times, make such compromises for short-term gains, especially when they want to get out of a low-equilibrium trap. Also, often, the externalities caused by damaging the environment, which affects everyone, are assumed to be everyone’s problem and not just that of the nation.

Instead, there should ideally be ban on the use of certain material or technology that damages nature, and which should be agreed upon by all the countries. Carbon tax is a softer option that only increases the cost of damaging the environment (which will be passed to the consumer), but does not really bring an end to the polluting process. In India, for example, a simple thing like a ban on plastic bags has been difficult to implement due to various lobbies. Outright bans are the only way out.

Now, Romer talks of a positive stimulus to growth, which is based on knowledge or technology. This is logical because if one looks across growth patterns of various countries and compared the strategies pursued for higher growth, technology is the differentiating factor. That is why African countries remain slow-movers, while the East Asian economies were able to gallop on the back of innovation.

This story has played out historically, with the advent of the Industrial Revolution in the mid-19th century in Britain, through the years to the new technology revolution that started in the 1980s and has only been reinforced in the last four decades or so. In fact, a lot of progress in India can be attributed to innovation—the Green Revolution in agriculture or the IT revolution that changed the balance of payments dynamics.

An interesting observation by Romer is that when technology brings about growth, it is non-exclusive because the benefits do percolate to other companies and countries—though there could be litigation of all dimensions in terms of copyrights and IPR (Intellectual Property Rights) in both industrial as well as pharmaceutical worlds. He, therefore, spoke about the need for R&D subsidy to be given by governments to ensure that this spiral is maintained. The power of new ideas is hence quite supreme and cannot be contested. Here one can leave it to the market to drive such innovation, as it is intrinsic to the business models that focus on growth.

But two interesting questions can be raised here, when looking at the works of the two winners. The first is the link between technology and climate change. If new ideas based on innovation, a la Schumpeter, had to succeed—which is what the modest steam engine did, to begin with—it is not possible to ensure that such technology is consistent with sustainable growth. For example, the technology of mobile phones has brought in a broader debate of radiation emissions where the tenets of Nordhaus and Romer would collide. There has to be intervention by the government.

Second, when technology becomes labour-displacing, can it really lead to meaningful higher growth per se? This is important especially in labour-surplus economies, where the concept of technology has to be redefined, because in several countries in Africa and South Asia, where there is shortage of power, can innovations in the laboratory be practically viable? While this issue may have been discussed in Romer’s work over the years, the point to note is that innovation must be tailor-made to suit local requirements so that it does not disturb the ecosystem. The advent of artificial intelligence (AI) is relevant because such innovations are not yet tested, but could render several jobs redundant in countries like India where we have adjusted to the computer after almost three decades!

For India, the ideas of both these economists are very relevant. When talking of inclusive growth and creation of jobs, the focus has to be on using innovation in a stylised manner so that the large labour force is gainfully employed. The retail boom witnessed in India is a good example of how new ideas have made a difference.

The climate change issue is more challenging because, currently, while India may be meeting the global standards in terms of carbon emissions, there need to be internal rules to ensure that we protect the environment. The changing climate forces have created volatility in the monsoon patterns and global warming has already made its imprints as witnessed by the significantly higher temperatures in some parts of the country. Laws need to be in place that ensure there is a proper marriage of technology with carbon emissions before unbridled growth spoils the story in the near future.

-The writer is Chief Economist, CARE Ratings. Author of ‘Economics of India: How to Fool all People for all Times’. Views are personal

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