Accounting for progress

I read Stephen Macekura’s The Mismeasure of Progress: Economic Growth and its Critics in proof, and just enjoyed reading it again now it’s been published. People who know about my work won’t be surprised to hear that this is just my cup of tea. The question preoccupies me as much as it ever did – what counts as progress and how do we count it? – along, increasingly, with the issue of who gets to answer the question.

There are now quite a few books about the limitations of GDP, or history of GDP, or both (eg as well as my GDP: A Brief But Affectionate History, Matthias Schmelzer’s The Hegemony of Growth, Philip Lepenies The Power of a Single Number, Ehsan Masood’s The Great Invention, Brett Chrostophers’ Banking Across Boundaries, and more). So Macekura has this recent literature to build on as well as older classics including Alain Desrosieres and Theodore Porter. What he brings is a unified story about the critics of GDP and the System of National Accounts told from the 1940s on, and particularly including the perspective of the economists and statisticians working on or in developing economies.

That the arcana of economic statistics matter is clear from the start: “Accounting and accountability are closely intertwined,” Macekura writes. His framework is James Scott‘s powerful concept of state ‘legibility’. This makes the imperialist habit clear when it comes to the history of national accounting in the colonies of western powers. As one Colonial Office official put it, the UK had to ‘level up’ its colonies, and would do so by increasing their GDP growth. Hmmm. That term is oddly familiar.

The heroes of the tale in some ways are economists such as Phyllis Deane of NIESR and Dudles Seers, founder of the Institute for Development Studies, for their appreciation that economies are not all the same. The fabric of life in low income countries was profoundly different from the standard framework it was supposed to fit. However, western critics of the focus on economic growth – whether for this reason or because of the increasing concern with environmental limits – were in turn criticised by some economists and others from the countries concerned, who considered that to not prioritise growth was a western luxury. “The Limits To Growth report [1972] prompted a strong backlash from experts in the Global South,” Macekura notes. He goes on to argue that, “Growth critics often sought to replace one set of numbers in governance with another. They mounted a technocratic critique of technocracy that claimed the basic problems of contemporary life could be resolved through the use of socially relevant and more specialized data.”

The book ends with a picture of the critics of growth and of GDP (overlapping but certainly not identical sets) in recent times, flagging questions such as the measurement of the financial sector, as well as the ever-more pressing sustainability issues. He ends with a call for a wider set of metrics but also for enfranchising people to participate in the debate about progress. There is certainly quite widespread interest in matters of measurement, for all kinds of reasons, now. GDP is rapidly losing its legitimacy but the need for the social accounts that enable accountability is more important than ever.

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Amartya Sen

My colleague Lawrence Hamilton has written a terrific summary of the work of Amartya Sen, in a book in Polity’s Key Contemporary Thinkers series, just called Amartya Sen. It’s a fantastic introduction to the oeuvre written in a very accessible manner. I’ve read Sen’s books most relevant to my own discipline, and his work on social choice is of course pretty technical; nevertheless, it is clearly explained here.

The deep interest all economists ought to have in Sen lies in his profound – and successful –  challenge to utilitarianism, the philosophical foundation on which economic theory has been constructed. Much of what I do now is motivated by the need to rethink the practicalities of economic policy given that the social welfare standard we think we use to compare different policy outcomes is so flawed. So for example, our Bennett Institute Wealth Economy project looking at people’s access to certain types of asset is one attempt to find a set of economic statistics to measure progress that speak to the idea of Sen’s capabilities and functionings – just as GDP growth speaks to utility.

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Having said that all economists ought to be interested, relatively few are. When I once wrote an op ed along these lines, a very distinguished senior economist emailed me to say if I wasn’t a utilitarian, I wasn’t an economist. Another very distinguished economist couldn’t see the disjuncture between Paretian welfare economics and the fact that policy economists make social welfare judgements all the time in cost benefit analysis, competition assessments, evaluations of tax policy etc. We are socialised so early and thoroughly into utility-thinking that it’s hard to step outside it.

Lawrence’s book introduces Sen’s key ideas in social choice and his concept of capabilities. I found very helpful the way it highlights the importance of incompleteness of information in turning Arrow’s work into a possibility rather than an impossibility theorem.  It also very elegantly critiques Sen’s work, largely its failure to address the practical political and institutional realities, and undue optimism about people – for instance, in Sen’s emphasis on deliberative processes. What is the role of expertise? How does political power as it is distributed in reality affect the process of deliberation? Very topical challenges, to which Sen’s work does not offer answers. As the book says, “Theories of social choice have tended to assume that people’s preferences are given, but it is a fact of life in democratic politics that on a lot of issues people do not have clear preferences.

This is an issue for economics too: the construction of the deflators used to turn nominal pound or dollar GDP into ‘real’ GDP, on which so much policy hangs, relies on a theory of constant, known preferences which determine the utility of consumption, and yet modern economic growth is all about creating wants for new goods and services for which preferences have to be created. So at a time of rapid innovation it is not at all clear what the deflators and ‘real’ GDP measures are measuring.

What is nevertheless compelling about Sen’s approach is its focus on human agency, which “Drives [Sen’s] major conceptual innovation or development but also for assessment of standards of living in all contexts: his capability approach.” It isn’t the goods that matter but what people can do with them.

In short, all economists ouht to read Sen’s major works, but if they haven’t definitely ought to read this introduction. Excellent for students too, and for people in the policy world who would like an overview.

[easyazon_link identifier=”1509519858″ locale=”UK” tag=”enlighteconom-21″]Amartya Sen (Key Contemporary Thinkers)[/easyazon_link]

 

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If it isn’t creative, you don’t have much of an economy

I went to the launch last week of Patrick Kabanda’s The Creative Wealth of Nations, and was lucky enough to hear the great Amartya Sen (who wrote the foreword) give an introduction. It’s a terrific book, looking at the role of the arts in human well-being and economic development.

Kabanda grew up in Uganda in troubled political times, won a scholarship and graduated from Juilliard, then became for a time a World Bank development expert. This interesting range of life experience has convinced him of the importance of culture and the arts for three reasons: the direct economic importance of the cultural sector, the role of culture in stimulating the imagination and generating ideas, and its encouragement of collaboration and social capital. If it isn’t creative, you don’t have much of an economy.

The book covers several perspectives: there is a section making the general case for the economic importance of the arts; one looking at trade including the role of digital and tourism; chapters on gender and on the role of the arts in mental health and urban life; and one about data, and the paucity of statistics and weaknesses in conceptualising and measuring the creative industries and their economic development role.

There is an astonishingly small literature on the economics of arts and culture, given their importance in our lives but also – patently – the economy In the UK for instance it’s only recently that we’ve come to debate the ‘creative sector’ even though it’s comparable in scale to the financial sector. There are exceptions – Tyler Cowen is a prominent one. I’ve wondered if this reflects an avoidance of some difficult economic questions concerning how to handle public goods, externalities and self-fulfilling phenomena but this hasn’t kept economists from analysing environmental issues or financial markets. So I’m not completely sure of the reason. It’s tempting to suggest it’s because economists so often either don’t have or (more often) hide their human hinterland because of the culture of economics itself. Perhaps it’s because of the absence of data, the gaps in our understanding of how to measure intangibles with public good characteristics), and indeed the unmeasurability of some aspects of the arts. (The book kindly quotes me riffing on this.)

This lacuna in the economics literature of course makes The Creative Wealth of Nations all the more welcome. I particularly liked the chapters on mental health – so important for economic development in some countries and, crucially, in some rapidly-growing mega-cities fraught with violence in their slum areas – and on cultural tourism, both very thought provoking. The chapter on digital considers the oligopoly in the music industry and advocates a competing platform (dTunes, music for development) to create a market for local musicians who are below the radar of the big players.

As well as being a fascinating exploration of an area too little considered in economics, the book is also a throughly enjoyable read. It’s really well written and constructed around an extended musical metaphor – above my head but much appreciated anyway.

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Economic development in 150 pages

It sounds an impossible challenge, but Ian Goldin does an impressive job combining clarity and conciseness in his Development: A Very Short Introduction, one of the well-known OUP series. The book seems to be a version of his longer book from a couple of years ago, The Pursuit of Development. Its six chapters cover: what it is, how it happens, why some countries are poor and others rich, aid, sustainable development, and globalization. The book manages to give a reasonable capsule description of the debates among economists and some sense of how development economics has changed over time. It studiously avoids reacinh strong conclusions on the efficacy of aid, this being a rather factual chapter.

There’s a useful list of further reading at the end. I think someone knowing more or less nothing about the subject would come away with a rounded overview and the capacity – and interest, probably – to read more. I like the pay-off too: “Development is not simply or mainly about the lives of others. It is about ourselves and what we care about. Development is about who we are and our collective future.

My quibble would be that the charts aren’t all that illuminating and only partly because they’re in black & white. Maybe all charts from now on should be left to Max Roser and his team at Our World in Data.

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Performing (economic) miracles

The metaphor ‘economic miracles’ as applied to the few once-poor countries that have achieved a trajectory of catch-up growth is revealing: these growth dynamics are spectacular, but happen very rarely. In their terrific new book, Beating the Odds: Jump-Starting Developing Countries, Justin Yifu Lin and Célestin Monga give the best overview account I’ve read of how countries might begin to achieve the lift-off from poverty trajectory, and an outline of how in practical terms governments might go about it. And although directed at poor countries, their analysis is more general.

The book points out that mainstream thinking is both impractical and factually wrong. Impractical because, given the emphasis on institutions now, the advice is often: “Be more like Denmark.” Sure, that would be marvellous. Incorrect, because the examples we have of countries reaching escape velocity for the most part did not have the fine, transparent and effective institutions or high-quality infrastructure now usually recommended as preconditions.

One of the platitudes they attack is that corruption or at least bad governance is the main barrier holding back poor countries. Rich countries have corruption scandals too, they point out. Are these less severe than in poor countries? They ask whether the role of money in US elections or corporate lobbying in the west is really ‘less corrupt’. Is the expected 20% tip everywhere in the US different from the expectation in say India that one will make payments to all kinds of people – in both cases, people not earning very much can’t afford not to expect the tip.

So if not western-style institutions or education or infrastructure, what does lead to growth? The book answers: “Sustained growth takes place because of continuous technological upgrading, institutional innovation and structural change.” At the heart of the process is an evolving set of factor endowments. Poor countries must start from the reality of labour intensive resources, and must focus on using what they have; it’s all about (latent) comparative advantage. The factor endowments will change over time, and hence the need for changing institutions and adopting additional technologies. All countries are different: there is no standard, abstract model. High-profile failed ‘big push’ efforts typically ignored the reality of factor endowments – this includes examples such as Zaire’s (DRC) attempt to start up an auto industry in the 1970s, or Indonesia’s bid to enter the shipbuilding market, when neither had the capital or the skills to produce these goods, nor high enough incomes for a domestic market to grow.  Successful ‘miracles’ start with what they have, continuously diversify, and identify and encourage agglomeration economies.

The authors are firm advocates of strategic industrial policies, in the sense of continual upgrading of hard and soft (legal, financial, educational) infrastructures to suit the changing needs of the private sector, the goods and services it produces and the markets it serves. “Clearly, individual firms cannot internalise all these changes cost effectively, and spontaneous co-ordination among firms to meet these new challenges is often impossible. … For this reason, it falls to the government either to introduce such changes or to co-ordinate them proactively. This essential piece of the growth and development puzzle has been missing in the standard model and the traditional development policy framework.” The government also needs to provide information (about say technologies, management techniques and markets) and provide initial human capital (training): “The social value to the economy as a whole of the first movers’ investments is usually much larger than their value to specific firms.” Finally, governments may need to attract FDI or incubate new activities, “to overcome deficits in social capital and other intangible constraints.”

These roles for active government policy are surely valid – and as much for the UK as for a low income economy. The authors are deeply sceptical about the value of (much) foreign aid and especially the multiple conditionalities attached.

In short, “Modern economic growth is a process of continuous structural changes in industry and technology and in political and socioeconomic institutions.” This is as true now as it has been everywhere since the late 18th century. As the book points out, this is not a radical new idea – it quotes Simon Kuznets saying so in 1966, and indeed economists from Marx and Schumpeter to Robert Solow and Joseph Stiglitz have made essentially the same point. Somehow, though, by the time the official aid organisations get involved, the policy advice has been bowdlerised into a standard set of impossible conditions, not recognising how counter-productive these can be in a second-best world.

Elsewhere, the authors have developed a more practical toolkit (the GIFF, growth identification and facilitation framework) for governments to identify their economies’ specific endowments and niches. The downside of recognising the importance of context is that one cannot sum up an economic development programme in ten universal bullet points. In general terms, the book supports export zones and infrastructure investment, and mitigating rent-seeking through exposure to the sunlight of foreign competition as well as political leadership.

The book ends with The Conference of the Birds: thousands of birds embark on a long and perilous journey but only 30 make it the whole way. When they reach their destination, they find the mythical king they were looking for is a reflection of themselves. Achieving successful development cannot start with a list of mythical missing ingredients as preconditions. Development economists and donors have been wrong to insist on an ideal model, Lin and Monga argue – and they are no keener on the latest development economics fashion for experiments and RCTs, as these ask micro questions and get micro answers; they cannot address the need for structural transformation. The bottom line is pragmatism, and the willingness to embark on the long and perilous journey, like the brave handful of birds in the 12th century Persian story.

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