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Finance & Development, March 1978
Article

International growth, equity, and efficiency: An extension of Fred Hirsch’s ideas in his book Social Limits to Growth to a new international order based on “shared growth” among nations

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1978
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Jahangir Amuzegar

Can there be sustainable worldwide growth with greater global equity—without reducing international efficiency or undermining individual incentives? Yes, if certain just and durable relationships can be established among the world’s rich and poor. This article attempts to suggest some basic elements of such relationships.

Professor Fred Hirsch of Warwick University has attempted to postulate certain primary trade-offs between the objectives of growth, equity, and efficiency in western industrial countries. His Social Limits to Growth (Harvard University Press, 1976) is concerned with three fundamental questions: Why have the fruits of western economic growth been so disappointing? Why is there still so much concern with redistribution of income despite the fact that people are vastly better off? Why has there been such an increasing popular demand for governments to rid their societies of their socioeconomic evils? Hirsch’s main answer is that these three questions are interrelated and rooted in the very nature of a growing modern society where, in his words, “getting what one wants is increasingly divorced from doing as one likes.” Society confronts individuals with certain unreachable goals, in the pursuit of which affluence becomes paradoxically less and less satisfying; the pressure for income redistribution becomes somewhat compulsive; and government intervention in the economy reluctantly creeps in.

Hirsch demonstrates that the fundamental failure of economic growth and increased consumption to produce satisfaction for the individual has been caused by the difficulty of maximizing personal welfare, or obtaining social harmony, through mass affluence. The gist of his thesis is that, contrary to what economists usually assume, one’s happiness is not based solely on one’s income or achievement, nor is it independent of the welfare or status of others. Individual tastes and preferences are not personally determined, nor are they static; they are socially sanctioned and evolving. (This thesis had been previously espoused by Veblen, Dusenberry, and Galbraith, among others. But Hirsch puts it at the center of his welfare economics.) In Hirsch’s view, the utility, value, or pleasure received by an individual from a given consumption of goods and services essentially depends on how many other people also receive them. The larger the number of recipients, the less the value of the good. When only a few possess an object, its value (or utility) is infinitely greater than when a whole mob has access to it. Hirsch calls items whose value is very high in society “positional goods”— goods which, by their very nature, can neither be produced, nor distributed, en masse. For example, only one person can be the highest-paid corporate executive in the land at any given time; the whole bureaucracy cannot be invited to a state dinner; there is only one presidential box in a theater. These items are highly valued for their own sake. No matter how “middle class” a society becomes, positional goods are still at the very top. These goods remain on unreachable rungs of the social ladder for most people.

As more and more people receive the benefits of economic growth and increased consumption in a growing economy—as their basic needs are increasingly met— their preference for positional goods is enhanced. As the base of the ownership and consumption pyramid becomes wider, more people at the bottom begin to see the top more clearly and would like to be there. It is thus no longer the absence of pleasure (or deprivation from the basic necessities of life) that is irksome and dissatisfying, but the presence of nagging envy at not being able to emulate the superachievers.

Since positional goods are impossible or difficult to multiply, no matter how high people’s purchasing power over ordinary goods and services climbs, individual command over these hard-to-get goods remains more or less constant. So does people’s dissatisfaction. Thus, no matter how elevated the middle is, it is still a middle. In such a situation, more is no longer attainable except by a fortunate few. Growth, even if physically and ecologically limitless, thus becomes socially and psychologically limited.

Fred Hirsch, the author of Social Limits to Growth, died on January 10, 1978 at the age of 46 after a long illness. Mr. Hirsch, a well-known British economist and economic journalist, was a Senior Advisor in the Research Department of the Fund from 1966 to 1972, where he worked on many problems, including commodity price stabilization, gold, exchange rates, and special drawing rights. His new book, The Political Economy of Inflation, which was co-edited with John Goldthorpe, is forthcoming.

Global parallel of Hirsch’s theme

Hirsch’s basic questions find some striking parallels in the global sphere. Why has postwar economic growth and prosperity not produced world peace and economic stability? Why has the initial postwar emphasis on national reconstruction and development been increasingly shifted to a clamor for an international transfer of resources? Why has there been so much demand lately for reduced consumption and more conservation, instead of increased production and enhanced efficiency? Why has growth been so unsatisfying even to those who have been its main beneficiaries?

While totally satisfactory answers to these questions may not be available, some tentative explanations are not hard to discern. First, world politico-economic instability and the serious challenge to present international economic relationships have been caused by the failure of growth to lift every economy uniformly up a rung on the global ladder. In a relatively short span of 30 years, the real gross world product has increased fourfold; four times as much productive capacity has been created in this period as in all previous history. Yet, by monopolizing modern complex technology, the industrial countries have managed to keep international production and distribution patterns very close to the old colonial system. The economic relationships between the rich north and the poor south have thus become even more lopsided and inequitable.

Furthermore, economic growth has failed to be a cure for either unemployment or price stability. World growth in the last 30 years—phenomenal perhaps in absolute magnitude—has been accompanied by inflation, unemployment, or both. In the “west,” full employment has been attained mostly during wars or periods of war preparation. At other times, there has been excess capacity, idleness, and inadequate use of resources. In the “east,” unemployment has been “solved” only at the expense of productivity and through other “involuntary” measures. In short, the world as a whole has not been able to devise a production pattern under which all job seekers can work with existing equipment and available national resources efficiently and for a clear and worthwhile purpose.

Second, the clamor for the transfer of global wealth and income has been triggered by the wide and widening gap between the world’s rich and poor. Some 70 per cent of the world population living in the Third World are at present receiving only 30 per cent of world income. Some 750 million people in the world’s poorest countries lack the minimum requirements of food, health care, housing, and functional literacy. More than one billion people in the developing countries have an average per capita gross national product (GNP) of less than $150 a year; for the entire developing world, the figure is about $400. By contrast, the annual GNP per head in the member countries of the Organization for Economic Cooperation and Development (OECD) is more than $6,000. More distressing still is the fact that both the absolute and the relative gap between the world’s rich and poor remains dreadfully wide. Published data show that the absolute gap between average GNP per capita of the OECD and the developing countries, which stood at about $2,200 in 1950, surpassed $4,800 in 1975. And since the developing countries grew in per capita income at a somewhat lower rate than the developed nations during 1950-75 (3 per cent versus 3.2 per cent), the relative gap in per capita incomes of the two groups has shown no improvement (see David Morawetz, Twenty-Five Years of Economic Development, 1950 to 1975 (World Bank, 1977)).

Even in the few developing countries where economic growth has eliminated unemployment and where there has been a measure of price stability, the problem of achieving an equitable distribution of wealth either has remained unresolved, or has been aggravated. In some of the fastest growing developing countries, the initial gap between urban and rural incomes has been widened. The same is true among less developed countries, as the original gulf between low-income and middle-income developing countries has been enlarged.

Third, the emphasis, particularly in industrial countries, on conservation, environmental considerations, and a leaner life-style has emerged from a latter-day awareness that material growth has failed to ensure real economic progress, social cohesiveness, or individual contentment. That is, the hitherto hidden costs of growth itself have made it increasingly less satisfying. Until recently, economic growth was commonly rationalized and welcomed for its ability to elevate a large portion of income earners into the middle class and to provide sufficient national savings to finance social welfare expenditures. A mere, unadjusted, upward change in GNP was thus a paramount social objective—regardless of cost. Social amenities associated with a larger GNP, such as great varieties of food, clothing for all occasions, climatically conditioned houses, more elaborate health care, bigger and more comfortable means of private transportation, and more recreation facilities, were added up and recorded on the credit side of the social accounts. Social ills, however, such as harmful food additives, extravagant waste of energy, unneeded and costly hospital accommodation, noise, pollution, congestion and accidents connected with private transportation, and vanishing individuality in leisure and self-amusement were seldom deducted, or accounted for, on the debit side. Now, the negative aspects are being taken into account, and as a result people are becoming increasingly better informed about the harmful side effects of growth.

Change in perceptions

The politico-economic implications of these recent changes in national and international perceptions are fairly clear. First, global patterns of production and exchange have become inherently unsustainable because their unfairness is likely to be conducive to global confrontation. As advances in technology have provided new opportunities for faster international growth and higher standards of living, those who have been left behind have become increasingly frustrated, angry, and rebellious. Second, the declining ratio of exhaustible natural resources to world population over the last 30 years has made world growth rates most difficult to sustain indefinitely. Third, even if physical and ecological constraints to continued economic growth (as measured by GNP per capita) were to be successfully dealt with, the largely hidden, but enormously high, costs of uninterrupted growth would sooner or later become prohibitive. And finally, even if the costs of growth in terms of waste or ecological imbalance were to be reduced, the universal identification of material growth with individual contentment and social harmony would become increasingly questionable.

To achieve the goals of sustained growth and equity combined with greater social harmony and increased individual freedom, a new and different order is needed. The original “limits-to-growth” thesis (which argued the logical—and almost truistic—impossibility of satisfying a rapidly growing, and high-living, world population in the face of fast-dwindling world resources) obviously offers no satisfactory solution. The “limitless growth” doctrine, which draws its popularity and strength from an unwavering faith in the power of science and technology to solve all human problems, also offers no serious alternative. Any viable option presumably lies somewhere between “unlimited growth” and “no growth.”

Equitable world order

One viable alternative may be a new world order that would ensure the goals of equity and sustainability for the whole world community. Such an order can be established through a combination of domestically adjusted, and internationally shared, growth strategies. The adjusted-growth concept could measure a nation’s economic progress in terms of “net national satisfaction” instead of GNP. Net national satisfaction, in turn, would be the sum of all social amenities and disamenities connected with the provision of a national product. The shared-growth concept would substitute the “net global satisfaction” for the gross world product by making a qualitative assessment of peace, economic stability, increased prosperity, and better incentives for cooperation.

Hirsch’s “new social balance” offers a “new set of priorities” in national economic policy and some “major adaptations in the ethos” of contemporary western society. His national agenda calls for (1) a reduction in the attractiveness of positional goods (leadership jobs) through smaller salaries and fewer fringe benefits for the super jobholders and greater possibilities for participation in leadership positions by others; (2) a fairer distribution of these goods among a large group by reducing inequalities of wealth and income; and (3) the imposition of some restrictions on the ownership of positional goods where social discrimination may be involved (such as private beaches). Hirsch considers such a policy package necessary for ultimate public acceptance of the privileges of a fortunate few and the stability of society.

An international policy package could be similarly formulated based upon Hirsch’s domestic package, under which every society could endeavor to achieve sustainable growth, combined with equity, in the context of global interdependence. Such a package would provide the basis of a new international balance.

The first principle of such a global package would be a gradual reduction in the relative politico-economic might of the industrial countries through deliberately increased “participation” by poorer nations in industrial production and international decision making. The clamor for greater equality in global income production and decision making is the international counterpart of the struggle by disenfranchised groups within a nation. In both situations, the main questions are: To what extent must the rich tolerate—if not enthusiastically welcome—certain preferential treatment of the poor in order to make up for past neglect, discrimination, and injustice? To what extent should the affluent go beyond the equal and non-discriminatory relationships—to practice reverse discrimination in favor of the underprivileged—to help redress lingering imbalances? (The case for reverse discrimination rests on the argument that life may be innately unfair, as is often said; but the fortunate few should not aggravate its inequities by hanging on to their lifelong privileges.)

The acceptance of this principle would, of course, require a major departure from the traditional western concept of interdependence—based largely on the linkage of ideas and ideals (human rights)— toward a new concept of interrelationships characterized by wealth sharing and shared decision making. The rich countries’ privileged position in the world community (like the positional status of the elite in a national economy) would be secure only if they were not effectively threatened by the poor—only if the masses accepted the leadership’s status, A similar comparison may be made with respect to the availability of resources for sustained growth. In a domestic situation, physical limits to growth arise when increased production can be achieved only by the use of nonrenewable resources; in the global scene, such limits would emerge when access to external sources of raw materials is curtailed or blocked by embargoes or other restrictions. If there is anything to be said for democratic participation in national affairs, then surely the same arguments are valid for nations participating in global decisions.

Narrowing income gap

The new international balance should also lead to a gradual narrowing of the income gap between rich and poor countries. This would be effected through compensatory measures such as increased foreign aid on better terms but with certain strict self-help requirements, improvements in the terms of trade through commodity agreements, the stabilization of export earnings, and an effective transfer of technology to help poorer countries deal with their stubborn problems of agricultural stagnation and massive unemployment or underemployment.

The acceptance of this second principle would call for a radical break with a new thesis that wishes to revive the old metaphysical faith in the preordained destiny of man—a faith not only in the inescapable individual inequalities at birth (looks, health, intelligence, and talent) but also in the inevitable unfairness of the human condition itself. The essence of this new (and blind) faith is that world poverty, ignorance, and disease are merely “social realities” to reckon with; that life’s inequities exist only in the eyes of the beholder and are a product of “pure reason”; that something which is not inherently immoral cannot be unfair; and that the poor know in their hearts that they themselves are responsible for their status in life. As proof of the truth of this argument, reference is made to a European Community opinion poll which reportedly found that the less educated and the poorer strata of European society blamed their poverty partly on themselves, while the well educated and the well-to-do lodged this responsibility on “social injustice.” (See Irving Kristol, “Thoughts on the Unfairness of Life,” Washington Star, August 20, 1977.)

The reality is, of course, quite different from these philosophical fantasies. Innate inequalities do exist, but they are not immutable. Inequities are not a matter of speculation or pure reasoning; they engulf the whole of humanity. The relationship between morality and fairness is the reverse of what the neoconservatives believe: what is unfair should be considered immoral, not the other way round.

And if the poor should resignedly accept the blame for their condition, it is not because they know more about themselves or about life—as it is simplistically alleged. Rather, it is because they know precious little about the absurdities of existing social relationships (and about the incongruities of international distribution of wealth and power). In a word they may not know how much less rewarding, even if easier, it is to engage in self-pity than to demand opportunities for self-improvement.

Finally, the new global balance would require some internationally agreed-upon restrictions on resource waste and conspicuous consumption which breed world polarization and tension. Such covenants may include cleaning up international rivers and lakes, more efficient international transportation, less nationalistic immigration laws, better human settlements, more equitable seabed exploration, population control, energy rationing, restrictions on grainfeeding of livestock, more globally efficient use of fertilizers, and so forth.

In short, the new international balance would emphasize the satisfaction of basic human needs in food, health, housing, education, and employment as its overriding objective. At the heart of this balance is both a domestic and an international economic strategy. The internal strategy focuses on fair distribution of national opportunities and incomes by observing the requirements of adjusted growth. The international strategy underlines equitable sharing of world resources, technology, and production by following the rules of shared growth.

In this cooperative new order for an interdependent world the rich and the poor would each have their own crosses to bear. The new order has no brief for ideologically based state intervention in the domestic economy, nor for expanded international regimentation. It removes neither individual nor national responsibility for self-development and progress. It only calls for certain pragmatic tradeoffs between unfettered growth and marketplace efficiency on the one hand, and global cooperation and equity on the other.

Under this new order, world growth and efficiency may not be maximized; but it would not be a rat race or a mindless competition for wasteful consumption. There would be sustainable growth, tempered with distributional equity, and ensured by adequate incentives for this generation as well as those yet to come.

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