Globalization

A better way of tracking economic growth?

poor man's burdenKaushik Basu of Cornell University and author of Prelude to Political Economy: A Study of the Social and Political Foundations of Economics, researched and found that governments rarely listen to economic advisors unless they are telling them what they want to hear.

Basu recently became the chief economic advisor to India’s finance ministry and so now has to see if he can overcome this issue.

In support of India’s elusive “inclusive growth” strategy, Basu has proposed a different way to measure GDP growth than the traditional approach of the economy as a whole.  He proposes that the country should measure the per-capita income growth of the bottom 20% (quintile) of the population.  Hence, this measures how much better the poorest are getting rather than the “average” citizen.

He goes further and suggests that it is not enough that the bottom quintile grows at the same rate as the average, but that the bottom 20% should get an equal absolute share of the income the economy adds.  So, if the economy adds $100B per year, the bottom 20% should add 20% of $100B or $20B to their income.

This is quite radical.  And, as The Economist notes, a “high bar indeed.”

I fear that this is an unrealistic goal and when you have unrealistic goals, often no progress is made.  I think it would be more productive to focus on an per-capita income growth for the bottom 20% which is substantially above the country’s average.  So, if the economy is expected to growth 7% overall, that you set a goal of the bottom 20% growing at 10% or 12% or some other progressive, but not unrealistic goal.

Your thoughts?

One thought on “A better way of tracking economic growth?

  1. Some year back I had read a report that was publicized in Indian newspapers that rural India was growing at around 4.5% compared to the 8-9% overall for the country as a whole. The paper said this is good news but from what I know from 8th standard Maths this means that actually the gap will get larger over time. One can of course track the bottom 20% to get a better picture of how growth is spread but given the current situation they will have to think very hard to push a higher growth rate there. As for the bottom 20% getting equal share, that means they are not bottom 20% anymore. So I agree that it is an unrealistic and very ridiculous suggestion. Sounds like what communists were trying. Recently I also read one interesting blog post about income distributions and how to think about it which could be a more relevant aspect for people to focus on. http://physicsofpoverty.blogspot.com/2010/03/who-cares-about-average-income.html

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