Growth yes, but not by all means
Writer: Hafiz Noor Shams
Published: Fri, 21 Sep 2012
The traditional understanding of economic growth has its fair share of criticism.
It has been criticised as being overly materialistic and overly focused on production with disregard for its side effects. Those with esoteric worldviews would accuse such progress as spiritually empty and unfulfilling.
While it is true that such growth does not take into account our human experience comprehensively—and possibly nothing can—it is a very important nonetheless.
Try living in a period when the gross domestic product and its typical variants that measure the mainstream idea about economic growth register a contraction. All the fancy criticism will take a backseat as very real economic pain hits far too many persons.
It is in that sense that the traditional idea of economic growth matter. There is something profoundly substantive about it; when economy does not growth, you will feel it, whatever your reservations about the mainstream understanding of the economy.
Yet, this piece is not a defence of the status quo, even as I do sit in the status quo camp.
Rather I write this to criticise those who pursue growth for growth’s sake. The way a society grows matters even within the current status quo framework. As a result, there is such a thing as mindless growth and mindless growth is one that focuses fully on how fast the GDP grows and not how it grows.
The clearest example happened on the days after the official GDP figures for the second quarter of 2012 were announced in the middle of August.
The Malaysian economy grew by 5.4 per cent from a year ago in real terms. The rate beat market projection and forced the gloomiest of private economists to upgrade their economic projection for the whole year.
While external factors continued to exert strong negative influence on growth, the domestic economy grew strongly still.
The primary reason why the domestic economy grew was due to extraordinarily strong private consumption.
It is hard to explain fully why consumption in the private economy—primarily spending of households as well as private firms—grew as strongly as it did.
Troubles abroad should affect domestic sentiment despite the excitement surrounding various projects related to the Economic Transformation Program embarked by the government. But it did not affect sentiment too badly.
One explanation for the strong private consumption growth was the cash transfer programme (Bantuan Rakyat 1Malaysia or BR1M) which was introduced by the federal government.
The cash transfer increased household wealth for some periods. The increased wealth effect in turn encouraged households to spend more. In a big way if I might add.
The commentariat has shared its piece of mind on the matter. Some has praised the cash transfer for boosting economic growth in Malaysia. The business section of the Straits Times in Singapore is one of which have sung praises to the cash transfer for the GDP growth that it had brought.
Unfortunately, this kind of growth is not the best of all growth possible.
Such cash transfer is always merely temporary and growth arising from such temporary measures is not sustainable.
While cash transfer does have its merits within wider context—for instead, cash transfer is more efficient and less wasteful that subsidy in improving individual welfare from microeconomic point of view—growth arising from cash transfer should be received with a measured nod, and not by throwing in a party.
One should acknowledge the growth the cash transfer program brought but one must also understand that without it, growth would have been less fantastic.
The counterfactual is important because it describes the more sustainable growth going forward.
Consumption growth arising from freebies from the government is not nearly as good as consumption arising from returns from productive investment or simply real growth in income won from effort.
Growth from the latter is the sustainable growth and it is sustainable growth that will determine the long-run or future state of the economy, but a one-off freebie.
To put it differently, one wants growth from productive enterprise and not from an effort at redistribution.
Redistribution of wealth—whatever its merits income or wealth egalitarian perspective—cannot really be created by merely redistributing wealth. At risk of committing a tautology, one has to create wealth to create wealth in the big, long-run picture.
In contrast, to put it simply, cash transfer is only an act of borrowing from the future to consume today.
This is one aspect which growth for growth’s own sake is wrong. To repeat the message, how the economy grows matters.