Frameworks for Assessing Efficiemt Economic Growth
Productive investments in infrastructure are the backbone of an economy. Like in the human body; when the backbone is strong, you get a healthy growth… A weaker backbone means that you can’t get any growth of the entire body… When the backbone is broken and you still get growth; it is 100% a cancer growth! How framing the health of economic growth?
There is growth in some economies that is like a cancer; not a healthy one… According to the National Cancer Institute; “Cancer cells differ from normal cells in many ways that allow them to grow out of control and become invasive. One important difference is that cancer cells are less specialized than normal cells. That is, whereas normal cells mature into very distinct cell types with specific functions, cancer cells do not.” I use the parallel between the growth of cancer cells and that of normal ones to show the difference between a healthy or efficient economic growth from an unhealthy or inefficient one.
The concept of growth in economics can be explained in many different ways. Let simplify its meaning. Within an economy, households, businesses and the government produce goods and services that they exchange, trade and consume. They spend money in capitals on investments to acquire assets, which produce goods and service that are sold or supplied for consumption.
When assets produce revenues or incomes that exceed the spending on their investments and operations’ budgets; their results generate either a profit (for firms) or a surplus (for the government) or savings (for households), which represents the added value for these assets. It is the added value of assets that makes the economy growing. The aggregated added value of each asset at microeconomic level (each unit of production) defines the economic growth at the GDP macroeconomic level.
Many frame growth as the exclusive outcome of productivity. Growth is not only the outcome of the increasing of the supply side productivity. Otherwise Japan 🇯🇵 wouldn’t have been in depression for many years.
Let assume an economy that boosts its supply side productivity with robots. If there is no induced increase of the demand and consumption with a purchasing power that monetize the increasing of the supply productivity; you won’t get the GDP growth, which translates in the creation of wealth. This is why demographic growth from births and/or immigration can play on both sides of the supply and the demand & consumption, which are the drivers of economic growth.
Like a living organism growth, the economic growth too can be either healthy or a cancerous one. My theory is that it is possible to make the difference between a financially, economically, socially and environmentally healthy growth of the economy from an unhealthy or cancerous one. The healthy economic growth is financially, economically, socially and environmentally efficient. How to measure or assess such efficiency or performance of economic growth?
- Financial health of growth or its financial performance
The Minsky theory is the best framework to assess the financial health of growth of assets, by extension of an economy. Following the Minsky theory, I make a distinction of 3 type of growth:
The first type of growth is a healthy or efficient one that comes from hedge financing. In this case, revenues from assets are enough to cover investment and operation expenses with a positive result as profit. The two other types of growth are like cancer growth when assets’ cash flows are the results of speculations in overpricing their value instead of revenues from their operations. Such overpricing can be either in borrowing on the net value of their equity or in selling their shares on the financial market while their operations cannot generate enough cash or expected revenues to justify such speculation or hyperinflation on their pricing. Usually, an economic growth that comes from such financial speculative activities without any strong basis in the real economy ends up in a financial crisis when the systemic risk spreads after a major correction or deflation of asset prices. It is like a cancer turned in metastasis.
- Economic health of growth or its economic productivity
The concept of productivity and the laws of diminishing returns and diminishing marginal utility provide a strong framework to assess the economic viability of growth. A growth that is economically healthy is the one that comes from very productive assets, which are efficient. This means that assets use efficiently resources in getting an optimized result. In applying the rules of diminishing returns and diminishing marginal utility; assets are no longer efficient when their productivity decreases; their growth becomes economically cancerous. An economy whose growth is based on inefficient assets with decreasing productivity is no longer economically healthy or performing: they destroy and burn huge resources for an anemic growth. A typical scenario of stagflation or deflation in disguise.
- Social health of growth or its societal fair distribution
The concept of a socially (un)healthy economic growth that I propose frames the questions and issues of fairness in the way economic growth is distributed among all economic agents or stakeholders within either an organization or the society. When the economic growth is distributed fairly among economic agents (or stakeholders); it is socially healthy. Unfairness in the distribution of economic growth often leads to tensions and conflicts making the entire economic process unhealthy. However there is a huge difference between fairness and equality. Also before ensuring a fair distribution of growth, it is very critical to ensure its fair creation. When the society doesn’t ensure fairness in creating wealth; you get unfairness in its distribution.
- Environmental health of growth or its environmental sustainability
Finally the environmental sustainability of economic growth determines whether an economy is healthy or not. When an economic growth comes from the destruction of the environment; it is not a healthy one. Most of resources an economy needs to function come from the environment; by destroying the environment for short term growth; it is the long term sustainability of the economy itself that is at peril.
A deteriorated environment puts at risk economic agents and natural resources needed to make en economy operational and functional. No production, no trade and no consumption is possible where economic agents and natural resources no longer exist; neither can growth be significant and strong where economic agents and natural resources become negatively affected because of the degradation of the environment.
In conclusion, it is not enough to get growth. Economic agents should make sure that their investments in assets at the microeconomic levels lead to a healthy economic growth both at micro and macroeconomic levels. Individual decisions in the choices of investments by economic agents at the microeconomic levels can shape either a healthy growth at both levels or a cancerous one with long term negative externalities.
