Model Answer
0 min readIntroduction
Economic growth is conventionally understood as an increase in a country’s real income or output over time, generally leading to improved living standards. However, this assumption isn’t always valid. Jagdish Bhagwati, a prominent economist, challenged this conventional wisdom with his doctrine of ‘Immiserising Growth’ in the 1950s. This concept posits that economic growth, under specific circumstances, can actually lead to a deterioration in a nation’s welfare, making its inhabitants worse off. This is a departure from the standard neoclassical model which assumes growth always improves welfare. The doctrine gained relevance during debates on import-substituting industrialization (ISI) and the impact of trade policies on developing countries.
Understanding Immiserising Growth
Immiserising growth occurs when the benefits of economic growth are outweighed by the negative consequences, resulting in a decline in real wages and overall welfare. It’s not simply a case of unequal distribution of growth’s benefits; rather, the growth itself actively harms the economy. Bhagwati identified three primary mechanisms through which this can occur:
Mechanisms of Immiserising Growth
1. Deterioration in Terms of Trade
This is the most frequently cited mechanism. If a country specializes in the production of goods whose demand is relatively inelastic (i.e., demand doesn’t increase much with price decreases) and its export prices fall as output increases, its terms of trade will deteriorate. This means it receives less for its exports in relation to the price of its imports.
Example: Consider a developing country specializing in the export of a primary commodity like coffee. If a global coffee glut occurs due to increased production, the price of coffee falls significantly. Even if the country increases its coffee production (economic growth in the coffee sector), its export earnings may decline, leading to a lower standard of living.
2. Increasing Relative Scarcity of a Factor of Production
If a country experiences growth that is biased towards the intensive use of a factor of production that is already relatively scarce, the returns to that factor will fall. This can lead to a decline in the real wages of workers who supply that factor.
Example: A country with a limited supply of skilled labor that experiences rapid growth in skill-intensive industries might see wages for unskilled labor stagnate or even decline, as the demand for skilled labor outstrips supply. This can exacerbate income inequality and reduce overall welfare for a significant portion of the population.
3. Negative Externalities
Growth can generate negative externalities – costs borne by society that are not reflected in the market price of goods and services. These externalities can include pollution, resource depletion, and social disruption. If these externalities are significant enough, they can outweigh the benefits of economic growth.
Example: Rapid industrialization in a country without adequate environmental regulations can lead to severe air and water pollution. While the industrial sector may experience growth, the health costs associated with pollution can reduce overall welfare.
Conditions for Immiserising Growth
Bhagwati emphasized that immiserising growth is not inevitable. It occurs under specific conditions:
- Small Country Assumption: The country must be small enough that its increased production significantly affects world prices.
- Specific Factor Model: Factors of production (labor, capital) are not perfectly mobile between sectors.
- Inelastic Demand: The demand for the country’s export goods must be relatively inelastic.
- Strong Negative Externalities: The negative externalities associated with growth must be substantial.
Relevance and Criticisms
The doctrine of immiserising growth was particularly relevant in the context of import-substituting industrialization (ISI) policies pursued by many developing countries in the mid-20th century. ISI aimed to promote domestic industries by protecting them from foreign competition. However, Bhagwati argued that ISI could lead to immiserising growth if it resulted in the production of goods with low comparative advantage and deteriorating terms of trade.
The doctrine has faced criticisms. Some economists argue that it relies on unrealistic assumptions, such as perfectly inelastic demand. Others contend that technological progress and diversification can mitigate the negative effects of immiserising growth. However, the concept remains a valuable reminder that economic growth is not always beneficial and that policymakers must consider the potential negative consequences of growth alongside its benefits.
| Mechanism | Description | Example |
|---|---|---|
| Terms of Trade | Falling export prices due to increased supply and inelastic demand. | Coffee-exporting country facing a global glut. |
| Factor Scarcity | Declining returns to a scarce factor due to biased growth. | Skill-intensive growth in a country with limited skilled labor. |
| Negative Externalities | Costs borne by society not reflected in market prices. | Industrial pollution reducing public health. |
Conclusion
Jagdish Bhagwati’s doctrine of ‘Immiserising Growth’ provides a crucial caveat to the conventional wisdom that economic growth always leads to improved welfare. It highlights the importance of considering the structural characteristics of an economy, the nature of its trade patterns, and the potential for negative externalities when evaluating the impact of growth. While not a universally applicable phenomenon, the doctrine serves as a valuable reminder for policymakers to pursue growth strategies that are not only economically efficient but also socially and environmentally sustainable, ensuring that the benefits of growth are widely shared and do not come at the expense of overall well-being.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.