I heard maverick investor and essayist Nassim Nicholas Taleb in Mumbai last year tell his audience about Black Swans, a phrase he has used to describe low probability but high-impact events.
Taleb’s audience was made of traders and financiers, and his main examples were drawn from the world of financial markets. But there was a brief interlude when Taleb wandered into the realm of geopolitics to explain why a lot of stability we see around us and assume to be the natural state of affairs is actually a precursor to severe volatility.
He compared Italy and Saudi Arabia. Italy has seen an unending churn in governments: 59 governments have come and gone through the revolving door since 1946. One family has ruled Saudi Arabia since it became a nation in 1932. Italy seems chronically unstable while Saudi Arabia seems a paragon of political stability. Yet, said Taleb, Saudi Arabia was actually a far riskier place than Italy. I suppose part of the reason is that Italy is a democracy and Saudi Arabia is an autocracy.
Prime Minister Manmohan Singh said in his Independence Day speech that restoring our growth rate to 9% is “the greatest challenge we face”. He went on to add that he expected the economy to improve by the end of the year.
I’ll return later to how this ties in with Taleb’s point about geopolitics, but a lot of the economic debate has been framed in ways that are similar to what the Prime Minister said on 15 August: how soon India will get back to the growth path of 2004-08.
It is almost being assumed that 9% growth is the natural state of things and what we are going through now is a brief and unfortunate hiatus. But what if those boom years were the exception and 6% growth is the reality?
Economists have puzzled over why some countries grow, some stagnate and some have a short burst of high growth and then falter. But it is sobering to remember that only 13 countries in the post-War period have managed to maintain a poverty-busting growth of 7% a year over 25 years, according to the Commission on Growth and Development headed by economist Michael Spence. These countries are Botswana, Brazil, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand.
In other words, while there have been many growth accelerations over the past six decades, cases of sustained growth over a quarter of a century have been far less common. But such sustained growth is needed to raise productivity, create non-farm jobs and push up incomes.
It is also important that this growth is not volatile, with sudden jumps followed by steep declines. The standard view of the 1990s was that economic reforms that were part of the Washington Consensus were needed to lift nations out of poverty. There is little doubt that such reforms have led to higher economic growth in many countries, including India. But is that all?
A new line of research shows that social and political institutions too have an important role to play in reducing macroeconomic and growth volatility. For example, in a 2003 paper published in the Journal of Monetary Economics, Daron Acemoglu, Simon Johnson, James Robinson and Yunyong Thaicharoen show that economic instability is more likely in nations with weak institutions. Democracy is one of them: Others have shown that democratic countries experience less economic volatility than dictatorships.
In a recent paper, David Cuberes and Michal Jerzmanowski cover some of this same territory. In an article that was based on this research and published by VoxEU.org, Cuberes and Jerzmanowski conclude: “Less democratic countries not only fail to sustain growth, but also see its fruits undone by large slowdowns or periods of decline that follow their growth spurts. In fact, the growth spurts themselves can equally correctly be viewed as periods of successfully initiating growth or as symptoms of the underlying weakness of the economy which, by limiting diversification, makes large growth accelerations possible while at the same time facilitating the dramatic reversals.”
This takes me back to Taleb’s point about Italy, Saudi Arabia and political stability. Much the same can be said about economic stability: Democracy and institutional development ensure that some countries have a better chance to manage economic instability and sustain growth.
The bottom line is that international growth experiences show that growth accelerations can peter out and sustained growth is tougher than expected. India still has a good chance to become the 14th country that could sustain high growth over 25 years and finish off absolute poverty. But we do need more economic reforms and stronger institutional capabilities.
Most importantly, let us not take 9% growth for granted.
Your comments are welcome at email@example.com