Search This Blog

Thursday, February 26, 2015

How to measure the quality of growth

Recent economic and political history has extensively shown that high growth alone does not necessarily lead to better social outcomes. Over the past few decades, many developing countries experienced strong growth episodes, but relatively few posted significant declines in poverty, inequality, and unemployment (see Commission on Growth and Development 2008, Dollar and Kraay 2002 and Dollar et al. 2013). Growth has to be inclusive or broad-based so as for countries to reap the most from it (Ianchovichina and Gable 2012, Anand et al. 2013). In a nutshell, it matters whether the underlying quality of growth is good.
The ‘quality of growth’ has therefore become part of the popular lexicon over the past few years. The explosion of the interest in the quality of growth, and more broadly in inclusive growth, is a reflection of this realisation. A simple benchmarking using trends search in Google reveals that there is vivid and growing interest in the topic.
Figure 1. “Inclusive Growth” Google Search Trend over time*
*Note: Google searches data are normalised on a scale from 0-100; each point is divided by the highest point and multiplied by 100.
Measuring the quality of growth: New approach
Yet, the concept of quality of growth often means different things to different people. This makes it difficult to understand what exactly people are talking about, all the more given that a formal quantification is missing so far in the literature. More to the point, can we measure the quality of growth?
Recognising this state of affairs, we set out to develop a more rigorous statistical approach. In our recent working paper (Mlachila et al. 2014), we build on Martinez and Mlachila (2013), and argue that good quality growth is one that is strong, stable, sustainable, increases productivity, and leads to socially desirable outcomes, such as improved standards of living and poverty alleviation. To assess all these aspects statistically, we develop a new quality of growth index. The composite index encompasses both the intrinsic nature of growth (strength, volatility, and sources) and its social dimensions (health and educational outcomes). We thus aim to capture the multidimensional features of growth as illustrated in Figure 2.
Figure 2. Conceptual representation of the quality of growth index
So what’s new about the index, you might ask? Is it just a rehash of the well-known Human Development Index (HDI) developed by the UN (Klugman et al. 2011)? For our index, we go beyond the levels of incomes, and focus on the very nature of growth – its strength, stability, sectoral composition, etc. Arguably, since the HDI is income-based, one could reasonably say that it is actually the result of millennia of accumulated growth.
Our index thus has the advantage of allowing us to assess the quality of various episodes of growth both within and across countries.
This is particularly interesting in that it can more usefully inform policymakers so as to whether their growth strategy is yielding good results. Moreover, our index allows getting to the bottom of the matter, by singling out growth and social performances actually attributable to current or recent policymaking.
Findings from the new quality of growth index
To build our index, we focus on developing countries. Due to data limitations, our index covers 93 developing countries in various stages of development over the period 1990 to 2011.
Our findings are four-fold.
  • First, the quality of growth has been improving over the past two decades.
  • Second, the least performing countries tend to catch up the best performers over time, though at a slow pace.
This is in line with the traditional convergence hypothesis found in the growth literature. In other words, once a country has reached a high quality of growth level it becomes increasingly difficult to keep on improving it—there are limits to the improvement of life expectancy, for instance. The inverse is true for countries at the bottom of the ladder.
Figure 3. The quality of growth index over time
tapsoba fig3 20 feb
  • Third, there are cross-country variations in income levels and regions (Figure 4).
Upper-middle income countries (UMIC) record the highest scores, followed by lower-middle income countries (LMIC) and low-income countries (LIC), respectively. Fragility is also a source of tougher structural impediments when it comes to achieving better quality of growth. Fragile countries significantly underperform the sample. From a regional perspective, Latin America stands as the best performer, followed by Central and Eastern Europe, Asia and Pacific, Middle East and North Africa, respectively. Sub-Saharan Africa countries rank at the bottom, though a handful of them, notably from Southern and Eastern Africa rose remarkably to the club of best performers.
Figure 4. The quality of growth index across income levels, fragile status, and regions
To really have lasting improvements in social outcomes, the quality of growth needs to be sustained over a long period of time—30-40 years. Countries such as China and Malaysia have achieved this. While a number of African countries such as Tanzania and Zambia have achieved notable improvements in the quality of growth, they need to sustain this momentum over a long period of time.
  • Fourth, empirical investigations allow nailing down the main drivers of the quality of growth index.
It appears that devoting more public resources to social sectors helps improve the quality of growth. Sound institutions and macroeconomic policies are also found to be associated with good quality growth, so is political stability, which altogether create an enabling environment for achieving stable and broad-based growth, and for delivering good public services. Moreover, greater financial development, which eases access to credit, helps unleash the private sector’s potential for creating wealth and decent jobs, and hence improves the quality of growth. Finally, external conditions matter for raising the quality of growth index, especially foreign direct investment— by helping to close the domestic saving gap and by accelerating the transfer of technology and knowledge.
Figure 5. The quality of growth index and its main drivers
Concluding remarks
We do realise, of course, that while our quality of growth index is a positive step in contributing to the debate on why not all growth is created equal, there are additional avenues to improve it. Like all indices, it is only as good as the underlying data. The quality of social data is particularly weak and patchy. As a result, we were forced to make a number of interpolations and use five-year averages. The index could also be enhanced and include labour market aspects and measures of inequality.
And finally, a word of caution. Our index does not say anything about long-term sustainability. Simply put, it cannot say whether a country’s current policies—which may improve the quality of growth now – won’t lead to economic or environmental disaster in the long run. For instance, a country may have improved its quality of growth by rapidly depleting its natural resources or running up public debt.
Disclaimer: The authors are economists at the International Monetary Fund, Washington DC. The views expressed here are those of the authors and do not necessarily represent those of the IMF or IMF policy.
Anand R, S Mishra, and J S Peiris (2013), “Inclusive Growth: Measurement and Determinants”, IMF Working paper No. 13/135.
Commission on Growth and Development (2008), Growth Report: Strategies for Sustained Growth and Inclusive Development (Washington: World Bank).
Dollar, D, T Kleineberg, and A Kraay (2013), “Growth is Still Good for the Poor,” World Bank Policy Research Working Paper No. 6568 (Washington: World Bank).
Dollar, D and A Kraay (2002), “Growth is Good for the Poor,” Journal of Economic Growth, Vol. 7, No. 3, pp. 195–225.
Ianchovichina, E and S L Gable (2012), “What is Inclusive Growth?”, Chapter 8 in Arezki et al. (eds), Commodity Price Volatility and Inclusive Growth in Low-Income Countries, International Monetary Fund.
Klugman, J, F Rodriguez, and H J Choi (2011), “The HDI 2010: New Controversies, Old Critiques”, Human Development Research Paper 1. UNDP―HDRO, New York.
Mlachila, M, R Tapsoba and S Tapsoba (2014), “A Quality of Growth Index: A Proposal” IMF Working Paper 14/172.
Martinez, M, and M Mlachila (2013), “The Quality of the Recent High-Growth Episode in Sub-Saharan Africa,” IMF Working Paper 13/53.
This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.
To keep up with Agenda subscribe to our weekly newsletter.
Author: Montfort Mlachila is an Advisor in the African Department of the IMF. René Tapsoba and Sampawende Tapsoba are Economists in the Fiscal Affairs Department of the IMF
Image: A worker dries coffee beans at the Santa Adelaida coffee cooperative in La Libertad, on the outskirts of San Salvador. REUTERS/Ulises Rodriguez