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Indian women hold placards with portraits of Chinese President Xi Jinping and Indian Prime Minister Narendra Modi as they wait to welcome President Xi on a visit to India in 2019.

R. Parthibhan/The Associated Press

Abhijit Banerjee is professor of economics at MIT. Esther Duflo is professor of poverty alleviation and development economics at MIT. They are co-founders and co-directors of the Abdul Latif Jameel Poverty Action Lab (J-PAL) at MIT, and (with Michael Kremer) the winners of the 2019 Nobel prize in economics.

One of the most worrying news stories of 2019 did not receive the coverage one might expect from media outlets in North America. But the economic slowdown in China, and the potentially steep deceleration in growth in India, will most likely receive considerably more attention in 2020.

The International Monetary Fund, the Asian Development Bank, and the Organisation for Economic Co-operation and Development have downgraded their growth estimates for India in 2019-20 to around 6 per cent, which would be the lowest since the beginning of the decade. Others claim that even this is optimistic and project much more dire narratives. For example, Arvind Subramanian, until recently the Indian government’s chief economic adviser, has argued based on triangulating evidence on various economic indicators that growth may sink as low as 3.5 per cent.

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In China, GDP growth has slowed from 14.2 per cent in 2007 to 6.6 per cent in 2018. The IMF projects that it might fall to 5.5 per cent by 2024. Rapid growth there and in India has lifted millions out of poverty, and the slowdown is likely to impede progress on improving the lives of the poor.

What should China and India do? Or, rather, what should they not do? When we were writing our book Good Economics for Hard Times in 2018, before the bad news about India started coming out, we were already concerned about a potential downturn there (the slowdown in China was already known). Anticipating the fall in growth, we warned that “India should fear complacency.”

The point we were making is simple: In countries that start from a situation in which resources are being used badly, as in China under communism or India did in its days of extreme dirigisme, the first benefits of reform may come from moving resources to their best uses. In the case of Indian manufacturing firms, for example, there was a sharp acceleration in technological upgrading at the plant level and some reallocation toward the best firms within each industry after 2002. This appears to be unrelated to any changes in economic policy and has been described as “India’s mysterious manufacturing miracle.”

But it was no miracle, just a modest improvement from a rather dismal starting point. One can imagine various reasons why it happened. Perhaps it resulted from a generational shift as control passed from parents to children -- often educated abroad, more ambitious, and savvier about technology and world markets. Or maybe the accumulation of modest profits eventually made it possible to pay for the shift to bigger and better plants. Or maybe both causes – and others – played a role.

More generally, perhaps the reason why some countries, such as China, can grow so fast for so long is that they start with a lot of poorly used talent and resources that can be harnessed to more valuable activities. But as the economy sheds its worst plants and firms, and solves its most dire misallocation issues, the space for further improvement naturally shrinks. Growth in India, similar to that in China, had to slow. And there is no guarantee that it will slow only when India has reached the same level of per capita income as China. India may be caught in the same “middle-income trap” that ensnared Malaysia, Thailand, Egypt, Mexico and Peru.

The trouble is that countries find it hard to kick the growth habit. There is a risk that policymakers will flail wildly in their quest to make growth come back. The recent history of Japan should serve as a useful warning.

If Japan’s economy had maintained the growth rate that it recorded over the decade 1963-73, it would have overtaken the U.S. in terms of GDP per capita in 1985 and in overall GDP by 1998. What happened instead is enough to make one superstitious: In 1980, the year after Harvard’s Ezra Vogel published Japan as Number One, the growth rate crashed and never really recovered. For the entire period 1980-2018, Japan’s real GDP grew at an anemic 0.5 per cent average annual rate.

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There was a simple problem: Low fertility and a near complete absence of immigration meant Japan was (and is) aging rapidly. The working-age population peaked in the late 1990s and has been declining at an annual rate of 0.7 per cent ever since (and will continue to decline). Moreover, during the ’50s, ’60s and ’70s, Japan was catching up after the disaster of the Pacific War, with its well-educated population gradually being deployed to its best possible uses.

By the ’80s, that was over. In the euphoria of the ’70s and ’80s, many people (in Japan and abroad) convinced themselves that Japan would nonetheless sustain rapid growth by inventing new technologies, which probably explains why the high investment rate (in excess of 30 per cent of GDP) continued through the ’80s. Too much good money chased too few good projects in the bubble economy of the ’80s. As a result, banks ended up with many bad loans, which led to the huge financial crisis of the ’90s. Growth ground to a halt.

At the end of the “lost decade” of the ’90s, Japanese policymakers might have started to realize what was happening and what they had to lose. After all, Japan was already a relatively wealthy economy with much less inequality than most Western economies, a strong education system and many important problems to address, chief among them being how to ensure a decent quality of life for its rapidly aging population. But the authorities appeared unable to adjust: Restoring growth was a matter of national pride.

As a result, successive governments vied to devise a series of stimulus packages, spending trillions of dollars mostly on roads, dams and bridges that served no obvious purpose. Perhaps predictably, the stimulus did nothing to increase economic growth and led to a huge increase in the national debt, to some 230 per cent of GDP in 2016 – by far the highest among the Group of 20 countries and a possible harbinger of a massive debt crisis.

The lesson for policymakers in China and India is clear: They must accept that growth will inevitably slow. China’s leaders are aware of it and have made a conscious effort to manage public expectations accordingly. In 2014, President Xi Jinping talked about a “new normal” of 7 per cent annual growth, rather than 10 per cent or more. But it is not clear that even this projection is realistic, and, in the meantime, China is embarking on enormous global construction projects, which doesn’t necessarily bode well.

The key, ultimately, is not to lose sight of the fact that GDP is a means and not an end. It is a useful means, no doubt, especially when it creates jobs or raises wages, or plumps the government budget so that it can redistribute more. But the ultimate goal remains to raise the average person’s – and especially the worst-off person’s – quality of life. And quality of life means more than just consumption. Most human beings care about feeling worthy and respected, and they suffer when they feel that they are failing themselves and their families.

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While living better is indeed partly about being able to consume more, even very poor people also care about their parents’ health, about their children’s education, about having their voices heard and about being able to pursue their dreams. Higher GDP is only one way to achieve this and there should be no presumption that it is always the best one.

Many of the important development successes of the past few decades were the direct result of a policy focus on this broader notion of well-being, even in some countries that were, and have remained, very poor. For example, a massive reduction in under-five mortality has occurred even in some very poor countries that were not growing particularly fast, largely thanks to a focus on newborn care, vaccination and malaria prevention.

This brings us back to the slowdown in India and China. There is a lot that policymakers in both countries can still do to improve the welfare of their citizens and help us cling to some hope about our planet’s future. A myopic focus on increasing the rate of GDP growth could squander that chance.

Copyright: Project Syndicate, 2019.

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