One day the world's population will start falling

For those who worry about global warming and all the other damage humans are doing to our planet, the latest news on world population growth doesn’t seem good. Fortunately, however, the relationship between population and the environment is paradoxical.

The United Nations Population Division updated its projections in June. From its present 7.7 billion, the world’s population is projected to have grown by 2 billion in 2050. It should reach a peak of nearly 11 billion at about the end of this century, before it starts to fall.

Fortunately, projections are just projections, based on a lot of assumptions that may or may not prove to have been accurate. Some prominent demographers believe the UN’s assumptions are too pessimistic.

It’s a mistake to imagine that controlling world population growth is just a matter of access to effective contraception. Economic development also plays a big part.

It’s the activity of humans that generates greenhouse gas emissions and does other damage to the natural environment, using up non-renewable resources, over-using renewable resources such as fish stocks and forests, damaging soil and waterways, and making species extinct.

So the more people, the more damage. Most human activity is economic – people earning their living. And, the way economies are organised at present, the richer people become, the more damage they do.

But here’s the paradox: the richer people become, the fewer children they have.

As my favourite magazine, The Economist, noted in an article, before the Industrial Revolution the typical woman probably had seven or more children. In 1960, the global fertility rate was six children per woman. Today it’s 2.5.

Within that global average, the fertility rate in rich countries is 1.7 children, below the replacement rate for a stable population of 2.1. In middle-income countries it’s 2.4, not far above replacement. In poor countries, however, it’s 4.9 children.

The first economic factor to reduce family size is urbanisation. When you leave the farm, you don’t need as many kids to help with the work. (Both my parents grew up on farms early last century. Dad was one of 14, and Mum one of eight. Their four children, however, had an average fertility rate of 2.5.)

But perhaps the most important factor is the spread of education, particularly of girls. It’s well established that the more years girls spend at school, the fewer babies they have.

“Education reduces fertility by giving women other options,” The Economist says. “It increases their chances of finding paid work. It reduces their economic dependence on their husbands, making it easier to refuse to have more children even if he wants them.

“It equips them with the mental tools and self-confidence to question traditional norms, such as having as many children as possible. It makes it more likely they will understand, and use, contraception.

“It transforms their ambitions for their own children – and thus the number than they choose to have.”

Worldwide, the proportion of girls completing primary school has risen from 76 per cent in 1997 to 90 per cent today. The proportion completing lower secondary school is nearing 80 per cent.

Fertility rates are low in Europe – particularly in Italy (1.33) – and in Japan (1.37). They’re below replacement rate in New Zealand (1.9), Australia (1.83) and the US (1.78).

But the lowest fertility rates are in emerging Asia: Taiwan (1.15) and South Korea (1.11). In the world’s most populous country, China, it’s 1.69, thanks to the one-child policy. After the relaxation of that policy it rose only briefly. Flats are too small and childcare too limited.

By contrast, India’s rate is 2.24, pretty close to replacement. And it varies greatly from 1.8 in wealthy states such as Maharashtra, to more than 3 in poor states such as Uttar Pradesh. Even so, India's population is expected to overtake China’s in 2027.

Because fertility rates cover the whole child-bearing lives of women, it takes a long time for the population of a country that's a bit below the replacement rate to start falling – assuming they don’t top up with immigration, as we do.

Even so, 27 countries’ populations have fallen since 2010 – sometimes with low fertility rates reinforced by high emigration. Over the next 30 years, 55 countries’ populations are projected to fall – almost half of them by more than 10 per cent. China’s may fall by about 31 million, or 2 per cent.

So what’s the problem? In a word: Africa. Its painfully slow rate of economic development leaves it still with fertility rates of five or six, including big countries such as Nigeria, the Congo, Ethiopia and Tanzania.

The best hope that the world’s population will stop growing sooner than the UN projects is that it has underestimated the rise of girls’ education in Africa (and India and Pakistan).

Of course, economic development is two-edged. It may stop population growth, but it makes everyone else richer and thus makes more demands on the environment.

Just as we can limit climate change without reducing energy use by switching to renewable sources, so we could reorganise the economy in ways that ensured continued economic growth didn’t involve continued destruction of the environment. If we had the will.

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In poor countries income does trickle down

Try this test of your economic literacy: has world poverty decreased or increased since 1990? If you said decreased, congratulations. You’re smarter than the average bear.

If you were sure it had increased, you’re the victim of a news media gone overboard in indulging your preference for bad news over good.

A lot of bad things are happening in the world, but also some really good things, and we immiserate ourselves when we fail to give them the notice they deserve.

In October the Word Bank issued a report announcing that world poverty had fallen in the two years to 2015. But since this was the continuation of a longstanding trend, the media took little notice.

So let me give it the fanfare it deserves. World poverty has been falling continuously – and rapidly - for the past quarter century. In 1990, 36 per cent of the world’s population lived in extreme poverty, but by 2015 this had fallen to 10 per cent – the lowest in recorded history.

This means the number of people living in extreme poverty has fallen by a billion, from almost 2 billion to 736 million. And that really does make it “one of the greatest human achievements of our time”.

The World Bank defines extreme poverty as living on less than $US1.90 a day, which has been adjusted for the US dollar’s differing purchasing power in different countries in 2011.

But how did this great achievement come about? It’s the result of rapid economic growth in the developing countries over the past three decades, particularly in China (and its trading partners in east Asia) and India (and other south Asian countries, including Bangladesh).

These countries have made no herculean efforts to redistribute income from the rich to the poor, they’ve just grown a lot over a sustained period. Which makes the fall in poverty in these countries a fabulous advertisement for the benefits of market economies and freer trade between countries.

And it’s a reminder that, in poor countries at least, a fair bit of the income generated by economic growth does trickle down to those at the bottom. Low-income households also benefit as more of the country’s income is spent on increasing primary education and spreading access to electricity, decent water and sanitation.

Actually, lower-income households in Australia have benefited from our 27 years of continuous economic growth, with their incomes growing quite strongly in real terms. That’s because of employment growing faster than the working-age population, wages growing faster than prices (until five years ago) and pensions (but not the dole) being indexed to wages.

But real wage and pension growth occur because of government policy. And since, in truth, tax cuts for companies and high income-earners do little to boost the economy and employment, their benefits don’t trickle down to any great extent.

Back to the point. Though the rate of extreme poverty has fallen in all the world’s regions since 1990, it’s fallen only a bit in Sub-Saharan Africa, while its population has continued growing strongly.

This means the Sub-Sahara now accounts for more than half the 736 million people remaining in extreme poverty, with south Asia accounting for a further quarter. It’s been largely eliminated in east Asia and the other regions.

If India’s present strong economic growth continues, its share of world poverty will fall away. The World Bank projects that, by 2030, Sub-Saharan Africa will account for nearly nine out of 10 of the world’s extreme poor.

Globally, poor people live overwhelmingly in rural areas and have lots of children. Judge poverty not by people’s income but by their access to education, electricity, water and sanitation, and the proportion in rural areas is even higher.

Note that the World Bank’s austere “international poverty line” of $US1.90 a day is an absolute measure of poverty. You work out the value of goods needed to barely stay alive, then adjust it for inflation over time, ignoring what’s happening to the incomes of the better-off.

By contrast, in rich countries like ours we measure relative poverty: how are real incomes at the bottom (often defined as half the median income) travelling relative to those around the middle and at the top?

So absolute poverty falls whenever low incomes grow faster than inflation whereas, for a fall in relative poverty, the real incomes of the poor need to grow at a faster rate than everyone else’s.

This, by the way, explains why absolute poverty in China and India can fall even while income inequality – the gap between rich and poor – increases. As it usually has.

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Growth in world economy will take a toll on the environment

If the world’s population keeps growing, and the poor world’s living standards keep catching up with the rich world’s, how on earth will the environment cope with the huge increase in extraction, processing and disposal of material resources?

It’s a question many people wonder and worry about – without much sign it’s even crossed the mind of the world’s governments.

Until now. The Organisation for Economic Co-operation and Development is about to publish a Global Material Resources Outlook, which uses much fancy modelling to make an educated guess about what’s likely to happen in the future.

The report projects that, over the 50 years to 2060, annual global use of materials – including metals, fossil fuels, biomass (food and fibres) and non-metallic minerals (mainly sand, gravel, limestone and other building materials) – will more than double, from 79 gigatonnes in 2011 to 167 Gt in 2060. Gosh.

So how did the report reach that figure? It started by estimating the likely growth in the world’s population. Although its rate of growth is expected to slow, the world population could increase from 7 billion to 10 billion by 2060.

At the same time, material living standards in the developing countries are expected to continue converging on those of the developed countries.

Gross domestic product per person is expected to continue growing at a much faster rate in the poorer countries than the rich ones. So much so that, by 2060, the global level of real GDP per person is expected to have reached where it was for just the (richer) OECD countries in 2011.

This implies a tripling in global income per person to about $US40,000 a year – after adjusting for PPP, purchasing-power parity, to allow for one US dollar buying a lot more in a poor country than it does Stateside. The fastest catch-up will be in China and, to a lesser extent, India and south-east Asia.

That’s good news for the world’s non-rich. It would be a bit rich for the well-off countries to expect the poor countries to stay poor just to reduce pressure on the natural environment in a way we’re not prepared to.

Multiply world population by world income per person and you get world GDP. It’s expected to quadruple.

Even so, its rate of growth may slow. Whereas at the turn of the century world GDP was growing at an average rate of about 3.5 per cent a year, it’s expected to stabilise at a rate of less than 2.5 per cent well before we reach 2060.

(Why? Partly because of arithmetic. It’s much easier for a small number to grow by a high percentage than for a big number to. But also because, when you’re way behind, it’s relatively easy to catch up with the world’s technological frontrunner, the US, by adopting its better existing technology. Once you’ve done the easy bits, however, it gets harder to grow as fast. China will account for much of the global slowing.)

But hang on. If world GDP is expected to quadruple, how come materials use is expected only to double?

It’s because other things – helpful things – will be going on at the same time. The first is that the world economy is “dematerialising”.

Machines and gadgets are getting smaller and using less metal, but more to the point is the “servitisation” of the world economy (there’s a new ugly buzz word to add to your collection) – the tendency for more of each dollar we spend to go on services rather than goods.

Services have lower materials “intensity” – materials use per unit of output - than goods. The shift in the mix from goods to services is a function of economic development. When you’re poor the main thing you want is more goods, but as you get richer there’s a limit to how much you want to eat or wear and how many cars and TV sets you need. But there’s no limit to how many things you’d like to pay other people to do for you.

This shift is already well advanced in the rich countries, but the poor countries have a lot of infrastructure and housing to build (and a lot of cars and TV sets to buy) before they begin to approach material satiation.

The share of services in world GDP is projected to rise from 50 per cent to 54 per cent over the 50 years.

A second helpful factor is that technological advance should increase the efficiency with which materials are used. The two factors are projected to reduce the materials intensity of world GDP at the faster average rate of 1.3 per cent a year.

So, the report finds, were materials use to keep up with economic growth, annual use would increase by 283 Gt to 362 Gt. But the shift to services will reduce that increase by 111 Gt and technological advance will reduce it by 84 Gt, meaning materials use rises to just 167 Gt in 2060.

Note, however, that this is growth in “primary” materials extraction, not “secondary” use of recycled materials, which the report says is likely to become more competitive and grow at the same rate. So increased recycling is another factor helping to explain the lesser growth in primary extraction.

With GDP growing faster than materials use, the report is expecting a partial “decoupling” of the two.

Of course, there’ll still be a big increase in pollution. Greenhouse gas emissions, but also acidification, freshwater aquatic ecotoxicity, terrestrial ecotoxicity, human toxicity via inhalation or the food chain, photochemical oxidation (smog), ozone layer depletion, and not forgetting increased land fill to dump the materials when we’re done with ’em.

Final point: this “baseline scenario” assumes no change in government policy. That’s the point: it’s intended to show the world’s governments how great is the need for them to make a policy response.

Such as? I’d like to see a tax on materials use, with the proceeds used to reduce the tax on labour income. Similar to a price on carbon, this would do much to encourage recycling, repair and renovation, and economising in the use of materials.

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We should rescue economics from the folly of neoliberalism

There's no swear word in politics today worse than "neoliberalism". It's badly on the nose, and the reaction against it has a long way to run. But what is it, exactly? Where does mainstream economics stop and neoliberalism begin?

The term means different things to different people. Professor Dani Rodrik, of Harvard, says in the Boston Review the term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal (budgetary) austerity.

I've always thought of it as a fundamentalist, oversimplified, dogmatic version of conventional economics, one from an elementary textbook, not a third-year text that adds the complications of market power, externalities​ (costs or benefits not captured in market prices), economies of scale, incomplete and asymmetric (lop-sided) information, and irrational behaviour.

Rodrik's conception of the term isn't very different. He thinks mainstream economics needs to be rescued from neoliberalism because, as people heap scorn on it, we risk throwing out some of economics' useful ideas.

Which are? That the efficiency with which an economy's resources are allocated is a critical determinant of its performance. That efficiency, in turn, requires aligning the incentives of households and businesses with "social" costs and benefits (so as to internalise the externalities).


That the incentives faced by entrepreneurs, investors and producers are particularly important when it comes to economic growth. Growth needs a system of property rights and contract enforcement that will ensure those who invest can retain the returns on their investments.

And that the economy must be open to ideas and innovations from the rest of the world. Of course, economies also need the macro-economic stability produced by sound monetary policy (low inflation) and budgetary sustainability (manageable levels of public debt).

Does all that smack more of neoliberalism than mainstream economics to you? If it does it's because mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions.

"A proper understanding of the economics that lies behind neoliberalism would allow us to identify – and to reject – ideology when it masquerades as economic science. Most importantly, it would help us develop the institutional imagination we badly need to redesign capitalism for the 21st century."

There's nothing wrong with markets, private entrepreneurship, or incentives, Rodrik says, provided they're deployed appropriately. Their creative use lies behind the most significant economic achievements of our time.

The central conceit and fatal flaw of neoliberalism is "the belief that first-order economic principles map onto a unique set of policies, approximated by a Thatcher-Reagan-style agenda" – also known as the "Washington consensus".

Take intellectual property rights. They're good when they protect innovators from free-riders, but bad when they protect them from competition (as they often do when the US Congress has finished with 'em).

Consider China's phenomenal economic success. It's largely due to its orthodoxy-defying tinkering with economic institutions. "China turned to markets, but did not copy Western practices in property rights. Its reforms produced market-based incentives through a series of unusual institutional arrangements that were better adapted to local context," Rodrik says.

Some may say China's institutional innovations are purely transitional. Soon enough it will have to converge on Western-style institutions if it's to maintain its economic progress. Well, maybe, maybe not.

What neoliberal proponents of the single route to economic prosperity keep forgetting is that none of the economic miracles that preceded China's – in South Korea, Taiwan and Japan – followed the Western formula. And each did it differently.

Even among the rich countries we see much variance from the neoliberal cookie cutter. The size of the public sector, for instance, varies from a third of the economy in Korea, to nearly 60 per cent in Finland.

In Iceland, 86 per cent of workers are in a trade union; in Switzerland it's 16 per cent. In America firms can fire workers almost at will; in France they must jump through many hoops.

Rodrik repeats an old economists' saying, one forgotten by the neoliberal oversimplifiers. "Good economists know that the correct answer to any question in economics is: it depends."

It depends on the particular circumstances, on how well your economic "institutions" (laws, official bodies, norms of behaviour) fit with those the model assumes to exist, on what you're trying to achieve, on your priorities, and on the political constraints you face.

As the Chief Scientist, Dr Alan Finkel, said when asked if he preferred his own emissions intensity scheme to Malcolm Turnbull's national energy guarantee: "There are a lot of ways to skin a cat."

Economics has many useful insights to offer the community. It must be rescued from neoliberalism because neoliberalism is simply bad economics.

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Why India's development is so strange

Every Aussie who takes an interest in such matters knows how a country goes from being undeveloped to developed. We 've been watching our neighbours do the trick for years. It' s called export-oriented growth and it 's all about building a big manufacturing sector.

You encourage under-employed rural workers to move to the city and take jobs in factories. Because your one big economic advantage is an abundant supply of cheap labour, you start by concentrating on making low-cost, simple, labour-intensive items such as textiles, clothing and footwear.

Since the locals don' t have much capacity to buy this stuff, you focus on exporting it. Foreigners lap it up because to them it' s so cheap.

As the plan works and the country 's income rises, you plough a fair bit back into raising the education level of your workers, which allows you to move to making more elaborate goods and to paying higher wages. You 're on the way to being a developed country.

Over the decades we' ve seen a succession of countries climb this ladder: Japan, Hong Kong, South Korea, Taiwan, China and now even Vietnam and Bangladesh at the bottom. It s like pass-the-parcel: as each country' s labour gets too expensive to be used to produce low-value thongs and T-shirts, some poorer country takes over and starts the climb to prosperity.

That 's the way it s always done. Except for one country: India. Its economy started growing strongly in the 1990s and now it' s the world 's third-biggest (provided you measure it correctly, allowing for differences in purchasing power).

India has got this far without building a big, export-oriented manufacturing sector. It 's done something that' s probably unique: skipped the manufacturing stage and gone straight to the rich-country stage, in which most growth in jobs and production comes from services.

The Indians have done it by being so good with software and other information and communications technology and the things that hang off it, such as call centres. It' s a big export earner.

It' s an impressive effort, and there' s no reason a developing country shouldn' t have a big tech sector. But, even so, the experts are saying India would be a lot better off if it had a bigger, more vibrant manufacturing sector, employing a lot more people who, by Indian standards, would be on good wages.

This is a key theme in the Organisation for Economic Co-operation and Development 's report on the Indian economy, issued this week.

The report offers suggestions on what could be done to encourage the growth of manufacturing, which go a fair way towards explaining why manufacturing never really got going the way it did in other emerging market economies .

First, some basic facts. India has a population of 1250 million and before long it will overtake China 's. About 29 per cent of the population is younger than 15.

Manufacturing accounts for only 13 per cent of India' s gross domestic product, which is low compared with the other BRIICS emerging economies: Brazil, Russia, Indonesia and China, but not South Africa.

Indian manufacturing probably accounts for a slightly smaller share of its total employment. Huh? It 's normally the other way round. You 'd expect it to be quite labour intensive. But "despite abundant, low-skilled and relatively cheap labour, Indian manufacturing is surprisingly capital and skill intensive," the report says.

Almost two-thirds of manufacturing employment is in companies with fewer than 10 employees. That compares with Brazil' s 9 per cent. This tells us the sector' s many small firms mean it isn' t exploiting its potential economies of scale.

And, indeed, its manufacturing productivity is low, with productivity 1.6 times higher in China and and 2.9 times in Brazil.

India' s employment in manufacturing hasn' t grown much over the years, with the sector hardest hit by the economy' s recent slowdown. What new jobs have been created have been " informal" , with workers not covered by social security arrangements.

Manufacturing' s share of India' s merchandise or goods exports (that is, ignoring the big and rapidly growing exports of IT services) fell from 77 per cent to 65 per cent over the decade to 2013.

My guess is an important reason for the sector 's unusual configuration and weak growth is excessive regulation. India has been and still is a highly, and badly, regulated economy. The socialists ' obsession with manufacturing means I wouldn' t be surprised if the newer technology sector has taken over the running because, being outside the Left' s traditional preoccupations, it wasn' t so heavily regulated.

Some regulation has been removed but, particularly as they apply to manufacturing, India 's labour and tax laws, which are tougher on bigger than smaller firms, have inhibited and distorted the industry 's development.

As the report puts it, manufacturing "firms have little incentive to employ and grow, since by staying small they can avoid taxes and complex labour regulations".

A second part of the explanation the report points to is what it calls "structural bottlenecks" . As with all developing countries, the whole Indian economy suffers under inadequate economic and social infrastructure.

But manufacturing is particularly reliant on good transport links - more so than the tech sector - and India 's transport infrastructure is still bad.

Every business needs a reliable electricity supply, but manufacturing probably needs it more than most. A business survey has found that 48 per cent of manufacturing firms experience power cuts for more than five hours a week. About 60 per cent of firms feel that erratic power supply affects their competitiveness and they would be willing to pay more for a more reliable supply.

As usual with developing economies, the list of things that need reform is long. The challenge for governments is to give priority to the ones that would do most to help, even though everything is interconnected.

In the case of Indian manufacturing, however, the OECD' s top recommendation is to introduce simpler and more flexible labour law, which doesn' t discriminate by the size of the enterprise.

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Chinese economy overtaking US and getting more like it

It isn't so many years since I used to berate the denizens of the financial markets for their lack of interest in the economy that had so much influence on ours: China. How things have changed. So has China.

After averaging growth of 10 per cent a year for 30 years, China's economy is now struggling to achieve its reduced target of 7.5 per cent. The financial market participants' role has been to watch on with concern.

And this week comes news that, though the International Monetary Fund sees China coming close to target this year, it expects it to slow to 7.1 per cent growth in 2015 and slow further in following years.

More surprisingly, the fund says that China should slow down to give it a chance to work on its big problems, rapidly growing debt and a rapidly contracting real estate market. Fumble those and growth could be even lower.

But while so many of us have been so focused on China's difficulty maintaining its rate of growth, we've lost sight of how big it is and how fast it's still growing compared with the rest of us.

Compared, say, with the world's biggest economy, the United States. Except that, according to the calculations of Euromonitor International, China will overtake the US this year. That's when you compare the two economies using "purchasing-power parity", which makes allowance for the fact that one US dollar buys a lot more in China than it does in the land of the free.

With China biggest and the US second, then come India, Japan, Germany, Russia and Brazil. We come in at 17th, not far behind Indonesia. The world certainly is changing.

Of course, the Chinese and American economies remain very different. China is big because of its much bigger population - 1.4 billion versus 300 million. Its income per person remains a fraction of America's. A not unrelated fact is that the US's productivity (measured as gross domestic product per worker) is more than nine times higher than China's.

And the two countries' industry structure is also very different. Agriculture contributes 10 per cent to GDP in China but just 1 per cent in the US. But get this: it accounts for almost a third of the workforce, compared with just 1.4 per cent in the US.

Manufacturing makes up 30 per cent of China's GDP, but only 13 per cent of America's. That tells us a lot about why China's rise, and the growth in its exports of manufactures, has affected so many other countries as well as maintaining downward pressure on world prices.

But the biggest difference between the two economies is their relative emphases on consumption and investment. Euromonitor International estimates that this year private consumption will account for 68 per cent of GDP in the US, compared with 37 per cent in China.

Here, however, we get to the really important news: the Chinese authorities have embarked on a process of "rebalancing" the economy, increasing consumer spending and domestic demand and reducing the roles of exports and investment in heavy industry.

The Economist notes that consumer spending has already begun its expansion, with its share of GDP rising from less than 35 per cent in 2010 to more than 36 per cent last year. And this year it has accounted for more than half the growth in GDP.

A big reason for stronger consumer spending is rapid growth in wages. Get this one: over the five years to 2013, real wages in manufacturing rose by about 2 per cent in the US, but by 45 per cent in China. As always happens, the benefits of economic development do flow eventually to ordinary workers.

This strong growth in consumption involves faster growth in the services sector, with manufacturing's share of GDP having peaked at almost a third in 2007.

This structural change means people following the ups and downs of the Chinese economy ought to be following a different set of indicators, as Peter Cai of China Spectator noted last week with help from Guan Qingyou, an economist at Minsheng Securities.

Cai says the main reason Chinese policymakers care so much about the rate of growth in GDP is their belief that the economy needs to grow by at least 7.2 per cent to absorb 10 million new entrants to the labour market each year.

But this correlation has been breaking down since 2010. Slower growth in GDP has not led to weaker job creation. Gaun suggests this is because the expanding services sector has a greater capacity to absorb new job seekers.


More fundamentally, China seems to be approaching its "Lewis turning-point", where a developing country runs out of its supply of surplus rural labour. This would also help explain the rising real wages.

Financial market participants focus on the growth in "industrial production" (manufacturing, mining and utilities) as a predictor of GDP growth, and on the manufacturing PMI (purchasing managers' index) as a predictor of industrial production.

But Cai says the strong correlation between industrial production and GDP is breaking down because the services sector is growing a lot faster than the industrial sector. Last year, for instance, the services sector contributed 47 per cent of the annual growth in GDP, whereas the industrial sector contributed less than 40 per cent. So, it's better to focus on the services sector PMI.

A big problem for China-watchers is that you don't know how much faith to put in official statistics. Earlier in his career, Premier Li Keqiang let it be known that he, too, had his doubts. So he focused on railway freight volumes, electricity consumption and bank lending as offering a better guide.

Now others have developed a "Li Keqiang index". But here, too, Guan argues that its reliability has declined, because of changes in the structure of industrial electricity use and changes in financing. China is changing.

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The little we know on how poor countries get rich

Despite the contrary impression they like to convey, there's a lot economists don't know. And in various parts of their discipline fads and fashions change without much real progress being made. Take development economics, the study of how countries develop economically, growing their production and consumption of goods and services until they move from being poor to being rich.

In his book, The Quest for Prosperity, Justin Yifu Lin - who spent four years as the World Bank's chief economist before becoming the director of the China centre for economic research at Peking University - reviews the progress of development economics and sums up the latest thinking.

Economists have specialised in the study of economic development since the end of World War II. How can a country accelerate its growth and wealth creation to move from a low-income agrarian economy to an industrialising middle-income economy and proceed to a post-industrialising high-income economy? And what are the respective roles of the public and private sectors in this transformation?

In 2006 the World Bank set up a commission to report on growth and development, noting the ''increasing evidence that the economic and social forces underlying rapid and sustained growth are much less well understood than generally thought; economic advice to developing countries has been given with more confidence than justified by the state of knowledge''.

The sad truth is that, since the war, only about 13 countries have made the transition to being high-income economies, with many progressing from the bottom only to get caught in the ''middle-income trap''.

In the early period after the war the dominant view among development economists was highly distrustful of markets and so highly interventionist.

''It held that the market encompassed insurmountable defects and that the state was a powerful supplementary means to accelerate the pace of economic development,'' Lin says. ''Many development economists then advocated that the state overcome market failures by playing a leading role in the industrialisation push, directly allocating the resources for investment and setting up public enterprises in the large modern industries to control the 'commanding heights'.''

These ''structuralists'' believed international trade couldn't be relied on as an engine of growth because any attempt to increase exports of commodities would simply worsen the developing country's terms of trade. They argued that the way for a developing country to avoid being exploited by developed countries was to develop domestic manufacturing industries behind high tariff barriers, a process known as ''import substitution''.

These attitudes continued to dominate until it became apparent they weren't working. In the 1980s, the pendulum swung to the opposite extreme. The ''Washington consensus'' - so called because it was enthusiastically adopted and imposed by the Washington-based international agencies, the International Monetary Fund and the World Bank - emphasised macro-economic discipline (limited accumulation of government debt), a market economy and openness to international trade and foreign investment.

But this ''neo-liberal'' approach fared little better. ''In terms of growth, employment generation and economic stability its results were disappointing, and some economists referred to the 1980s and '90s as 'lost decades' for developing countries,'' Lin says.

He says the main reason it failed to deliver was that it relied on an idealised set of market institutions - including well-functioning commercial laws and social norms of behaviour - which hardly existed in developing countries and weren't fully present even in the advanced economies.

Get this: when you look at those few countries that have moved up the industrial and technological ladder, you find they ''have rarely followed the policy prescriptions of the dominant development paradigm of the time.

''Most successful developing countries ? have expanded their manufacturing bases and moved into more sophisticated industrial products by defying conventional wisdom. In their development process, they pursued an export-promotion strategy instead of an import-substitution strategy ?

''And they each had a proactive government helping the private sector enter new industries instead of relying on market competition alone as advocated by the Washington consensus.''

Lin argues there's no simple, uniform formula for developing countries to follow. The strategy they adopt has to be adapted to their peculiar circumstances. Even so, the World Bank's growth report does identify five ''striking points of resemblance among all highly successful countries''.

First, they made the most of globalisation, importing ideas, technology and know-how from the rest of the world and exploiting global demand, which provided an almost infinite market for their exports.

Second, they maintained a stable macro-economic environment, despite periods of high inflation and public debt. Third, they had high rates of saving and investment, reflecting their willingness to forgo current consumption in pursuit of higher incomes in the future.

Fourth, they adhered to a market system to allocate resources. Their governments did not resist market forces in reallocating capital and labour from industry to industry. Fifth, they had committed, credible and capable governments.

In some countries, such as Hong Kong, the administration chose a laissez-faire approach (though it also had quite a number of sectoral policies), whereas in others the state was more hands-on, intervening with various tools (tax breaks, subsidised credit, directed lending) in the world of business to help private firms enter industries they might not have otherwise considered. The growth report also identified a series of ''bad ideas'' to be avoided by policymakers in their search for economic growth.

The list includes subsidising energy, using employment in the civil service to reduce joblessness, reducing budget deficits by cutting spending on infrastructure investment, providing open-ended protection to domestic firms, imposing price controls to stem inflation, banning exports for long periods, resisting urbanisation, measuring educational progress by the increase in school buildings, ignoring environmental issues as an ''unaffordable luxury'' and allowing the exchange rate to appreciate excessively.

It's clear Lin is a very bright chap and his book offers a valuable and balanced account of the progress and present state of development economics.

But it is marred by an amazing, credibility-destroying omission: in more than 300 pages about how the developed countries can raise their material living standards to those of the rich world, nowhere does he mention the challenge of climate change or the implications of such growth for the natural environment.

Like so many economists, he simply assumes the ecosystem away.

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