A look back on the change in world economy during our era

It is safe to say that in the entire human history, no equivalent time period witnessed as much increase in wellbeing as the last five or six decades, the period that I shall call our era. The most remarkable aspect of this transformation is that growth in this period has encompassed parts of the world that were bypassed by the first two centuries of industrial revolution. In the 21st century, a much larger proportion of aggregate material progress has taken place in what our generation knew as the developing world.  This growth has been multidimensional: income per person; increase in life expectancy, health and literacy; and reduction in the proportion of those who are in extreme poverty and destitution. In more recent decades these changes have taken place with amazing regularity. Despite all the noise accompanying the emergence of Donald Trump, the ugly sights of the bodies of refugees floating ashore in Europe and nearer home, and never-ending march of terrorism, the year 2017 has almost certainly been the best in human history in terms of the indicators of human wellbeing, but also of death and destruction due to conflicts among nations.

It is impossible not to qualify the achievements that our age has witnessed.  Let me highlight some of the important ones. Economists have long emphasised the notion of production possibility: the maximum that could be achieved from available resources and knowledge. The world’s material prosperity is well below what one might call the well-being and growth possibility curves. By organising our societies better, adopting policies that existing knowledge recognises to be optimal and avoiding unnecessary conflicts, aggregate human wellbeing and its growth could have been made much higher.  For evidence of this we need not look beyond our own subcontinent where the major countries - by limiting trade among themselves, fighting wars and arming themselves against one another-  have operated vastly below wellbeing possibility.

Secondly, one characteristic of rapid growth in recent decades has been an increase in the inequality of distribution of income pretty much everywhere. I often encounter two typical objections to this concern: (a) since much of income growth has been in poorer countries, it is likely that the inequality in the distribution of income among all individuals in the world has either not increased or increased very little; and (b) why should one worry about rising inequality when poverty of the worst kind has been declining?

I am not persuaded by either argument. We have no convincing evidence that the rise in intra-country inequality has been offset by the fall in inequality between countries. More importantly, it is inequality at the national and subnational level that determines the social fabric: the quality of democratic institutions and communal life. The reason one should worry about rising inequality despite falling absolute poverty is simply that with lower inequality the reduction in poverty would be greater.

Yet another issue of concern is that income accounting fails to allow for many elements of cost, most notably the enormous cost of environmental deterioration.

Economists have a way of making adjustment in change in distribution of income, by converting aggregate income into “equally distributed equivalent income”, though it requires judgment about how to compare the values to the society of units of income accruing to people at different levels of living. Economists also know how to make adjustment in environmental deterioration: treatment of some elements like loss of forests and water sources is straightforward; others like the effect on health require more information and judgment about society’s valuation of life expectancy and morbidity. In my view, making these judgments should in reality be less daunting than it appears.  The point is that equally distributed equivalent income adjusted for environmental deterioration, on any reasonable quantification of such value judgments, would knock several percentage points off thehyper growth rates that have characterized our age, notably in countries like China and India, as well as our own. Even after these adjustments the growth in wellbeing that has been achieved during our era will still be very impressive butless spectacular than official estimates claim. 

What about the institutional and organisational method of pursuing growth? At the beginning of our career many of our generation were inspired by the ideal of socialism, of which the dominant form was the Soviet kind of central planning by command. The hope was that it combined rapid growth and equality, documented respectively by the rapid growth of the Soviet economy when the capitalist world was mired in the great depression; and the promise that the abolition of private ownership of capital would end exploitation of labor and ensure equality. Long before the end of our career, the system of central planning by command broke down. The essential characteristic of the system that led to its failure to satisfy the material aspirations of the population was that it was devoid of a method of rational economic calculation,which is essential for efficient use of resources. The reason for this has been widely analysed, including by many who consider themselves to be inspired by socialist ideals.

The point I want to make is that Soviet kind of central planning did not even create the most egalitarian of societies. Numerous estimates made for the Soviet Union and the East European countries during the 1960s and 1970s showed that their inequality was lower than that for countries like the USA but higher than for the social-democratic countries of West and North-West Europe.  There are many explanations for this; but the one that I want to emphasise is that the hope that the abolition of private ownership of means of production would eliminate inequality was misplaced.  Marxian socialism identified private ownership of means of production as the source of capitalist exploitation and perhaps Marx was right in the context of 19th century capitalism. But under modern capitalism ownership of capital is typically dispersed and divorced from control and yet, by virtue of their control over resources top management arbitrarily distributes income in its favor. Soviet type of socialism abolished private ownership of means of production but entrusted bureaucratic control over them by individuals or oligarchic groups. There is no reason to believe that its distributional outcome would be any better than that under managerial capitalism.

The alternative to central planning by command is dependence on the market which is a feature of the capitalist economies. But market is no more necessarily a capitalist institution than say political democracy or technology. The limitations of the market are well recognised even by orthodox economic theory: the lack of equal access to information, the failure to recognise benefits and costs other than those accruing to the direct actors, and, above all, the inequality of endowment of resources among different actors in the market. The reason the market under capitalism is unjust is the underlying inequality in the distribution of income and wealth. Once the inequality is limited, and compensatory actions to offset other failures made, market can be a powerful, indeed the only available, mechanism to ensure efficiency in the use of resources. To reject the market is like imposing aban on conversation because some people have so loud voices as to drown the voices of the others; sensible solution is to limit the loudness of those who prevent others from being heard.

In most economies the primary distribution of income resulting from the production process is further moderated by ex-post redistributive policies. An Oxford study has made estimates of pre-redistributive and post-redistributive inequality for a selection of countries. The countries that have achieved the greatest equality are typically the countries that have achieved the biggest reduction between pre-redistributive and post-redistributive inequality: the social democratic countries. I therefore do not shed tears over the demise of the system of Central Planning as the evidence of the demise of my ideal of youth; instead I rejoice at the triumph of a feasible form of socialism in today’s world, social democracy which has combined economic efficiency with equality.

Reduction in inequality by ex-post redistribution is, however, difficult. It requires well established institutions which are common in social democracies but rare in the developing countries. It is therefore far more sensible for these countries to look for policies that make the production process itself more equalising: making growth employment intensive, promoting competition so that wage growth is widespread, promoting small enterprises and improving the human capital endowment of the poor. In the Oxford study, one country that achieves high equality with very low reduction in inequality by ex-post redistribution is the Republic of Korea. That must have been the case for the other original East Asian tigers. Contemporary developing countries like ours have a lot to learn from them in their quest for egalitarian growth.

* Dr Azizur Rahman Khan is a renowned economist. This is a summary of the talk he delivered at the Bangladesh Bank Award Ceremony in February 2018