STWR - Share The World's Resources

The self interest which individuals show in buying and selling goods allows markets to obtain reasonably high levels of welfare for participants. When those who set the rules of the market show the same self interest, free markets last as long as it takes to say subsidy, argues James Waters.

1st February 06 - James Waters, STWR 

The extent of distortion from free markets is of importance for development strategy. If incomes are low in poor countries mainly because the world trade system is weighted against them, then development workers may more usefully spend their time in developed country parliaments rather than in developing country schools.

Recent economic growth theory examines the contributions of capital, labour, education, and technology to production growth. These can be considered core economic inputs. It is the share of growth that they do not explain which is of equal interest here. This share is influenced by other factors such as market structure, civil conflict, corruption, and restriction of competition. Political factors are central among them.

Perhaps the most influential recent study in the field is by three academics, Mankiw, Romer, and Weil, which calculates that over three quarters of growth experienced is due to these core economic factors, based on analysis of a large set of countries which do not export petroleum. The rest of the growth, or lack of it, is due to better or worse than average performances in the other influences on production. The amount of growth which can be attributed to the economic factors in the richest countries considered separately is far less, arising in part because richer countries tend to have similar rates of investment and education per person and similar technological access, and so there is less scope in the data to demonstrate their effects.

The model and the results have been controversial, with notably different results being reported by other researchers. For example, one study claims that low and lower middle income countries have only a quarter of their growth accounted for by economic variables, at least in the model as specified. Another study, using similar methodology to the first, asserts that just over half of growth can be explained by the core economic factors.

Clearly, with such contentious empirical results, an alternative route to estimation of the effect of politics is useful. Growth accounting approaches attempt to split a region’s growth into its components by case specific calculation. An estimate may be made of the contribution agriculture makes to growth in India, for example. The amount of growth lost by intervention in markets is often of interest in development economics, such as the proportion lost through corruption.

A recent example of growth accounting was given in an article published by the International Monetary Fund and entitled Agricultural Trade: Reaping a Rich Harvest for Doha. It is estimated that the agricultural trade liberalisation envisaged in the present round of global agricultural trade talks would bring an increase in growth in income per person in the Southern African Customs Union of three per cent every year until 2015, assuming a default growth in the absence of liberalisation of three per cent. In other words, half of growth is taken from agricultural producers in developing countries because of distortion of the free market primarily by the European Union and the United States. The gain for the rest of Sub Saharan Africa would be an increase of 0.8 per cent, implying that 20 per cent of agricultural growth is lost because of such distortion.

Other examples of growth accounting can be found in reports published by the charity Oxfam. For example, it estimated in its 2004 study Dumping on the World that the European Union’s trade regime for sugar cost Brazil almost half a billion U.S. dollars in 2002.

Growth accounting is able to avoid general models when producing its estimates, so it steers clear of some of the problems associated with growth theory’s wide sweep. However, its results have less capacity for generalisation across industries or regions, so estimates at the world level can be subject to considerable uncertainty and can be time intensive.

Politics plays a clear role in deciding growth rates in one particular group of countries: the major oil producers. To some extent, they sidestep the usual mechanism of growth by accumulation, because wealth literally gushes out of the ground. Even decisions to set the petroleum price are made by an oligopoly, the most political of all common forms of market mechanism. The adoption of any economic system is in a sense political, so to an extent what is being said is that growth in oil producing countries is the outcome of one political process rather than another. However, whereas accumulating capitalism tends to gain its own impetus, economics in major petroleum producers is always drenched with the politics of black gold.

As a very tentative attempt at summarising the available knowledge, it seems likely that causes other than capital, labour, education and technology account for at least a quarter of the changes in growth observed within capitalist countries, and quite possibly half of them. At a worldwide level, the studies available suggest a similar magnitude of effects of politics and power in limiting the growth of developing countries, and a smaller effect on overall worldwide growth.

Growth analysis techniques have been described here, perhaps in a misleading way, as treating economic and political influences on growth as broadly equivalent. As a result, there are a few caveats which must be mentioned. Economic growth is capable of being sustained indefinitely in principle if not in practice, whereas politics is necessarily subject to limited possibility for improvement. However, politics is perhaps easier to change and affects growth more immediately than accumulation, and also quickly affects the important issue of income distribution. A dual approach to development activism is perhaps best, rather than entirely abandoning the village for the parliament or vice versa.

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