A theory of long-term decline?

Long-term economic decline has just one root cause: Rigidity. The refusal to change long established practice has always led to long-term disaster for everyone.

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T. C. A. Srinivasa-Raghavan

The last article in this series, a month ago, had ended thus: “The next time, instead of discussing growth, we will discuss decline, the mirror image of long-term growth. What causes decline? What policies to follow to arrest it?”

Some readers have asked why economics should bother with decline. The answer seems obvious, and has three elements.

First, just as growth theories are products of such intellectual curiosity, a theory of decline should be conjured up for the sake of intellectual curiosity; second, it might turn out that it is easier to pinpoint the causes of decline than the causes of growth; three, long-term decline is more easily arrested than long-term growth is achieved.

Causes of decline

The first issue, of course, is whether long-term decline is indeed a mirror image of long-term growth insofar as the causes are concerned.

As someone who has taken a fairly close look at economic history, I think it is possible to assert with reasonable confidence that it is not.

Decline seems to be caused by factors that are quite distinct from the assumed causes of growth, namely, investment, technology, knowledge, innovation, social institutions, political institutions, judicial institutions, economic institutions, governance, human capital, endogeneity, big-push, openness and geography.

Refusal to change

As far as I have been able to see, long-term economic decline, of empires starting from the Roman to countries starting from India in the third century, has been caused by just one root cause: Rigidity. The refusal to change long established practice, whether socially, politically or in the respective economies, has always led to long-term disaster.

The amazing thing is that many historians (Gibbon, Spengler, Kosambi, to name just three) have discussed the decline of societies, empires and countries for a long time. Yet economists — who are otherwise eager to trespass into all sorts of unrelated areas — have studiously ignored this aspect.

Understanding growth

The usual excuse is that the data about the past is not there to arrive at any meaningful conclusions. But, then, it can be asked with equal earnestness: What meaningful conclusions have you arrived at when the data has been there? Are we any closer to understanding growth than we were in 1946 when Messrs Roy Harrod and Evsey Domar came up with their growth model?

The question has important implications for policy. This is because it might be easier to prevent long-term decline than to maintain high growth through a variety of artificial means.

There is a riposte to this, namely, that growth theory seeks to provide answers to countries seeking to grow, not those seeking to maintain high levels of growth.

The answer is: study history. You will find that very often the effort to artificially maintain growth in one country or in part of the world, has kept down others who are seeking to grow, thus making a complete nonsense of growth theory, which pretends to provide growth formulae to them.

Tilting trade

Thus, Britain’s monetary policy towards India from about 1880 onwards is a stark example of this. It was designed to tilt the terms of trade in its favour.

British textile policy in the 1930s was designed to keep cheap Japanese imports out of India. Closer in time, as Ronald McKinnon has shown, the Plaza Accord of 1985, by fixing the exchange rate, finished off growth in Japan from 1991 till now.

China’s exchange rate policy since 1996 has been beggaring everyone in the developing world, including the US.

Dominant country must co-operate

An examination of these policies or actions by the dominant country leads to two conclusions.

The first is that the rate at which a country will grow depends on the political and economic needs of the dominant power.

There is very little all those things like investment, technology, knowledge, innovation, social institutions, political institutions, judicial institutions, economic institutions, governance, human capital, big-push, openness and geography can do if the dominant country does not co-operate.

These might be necessary in a weak sort of way, but they are nowhere near being sufficient to cause and sustain growth.

Result of neglect

This can be seen from India’s experience with the USSR (negative experience) and China’s experience with the US (positive experience). Now that India has a good relationship with the US, it too is growing. China will soon go the other way. Its goose is cooked because it has sought to rival the dominant power.

The second is, it is this dependence — which has been described in a different context by Raul Prebisch, Andre Gunder Frank, Paul Sweezy etc — as the centre-periphery theory that modern economics ignores. It is poorer for it because the neglect causes it to come up with incomplete theories and answers.

So, what should economists do? I think it would help if they got away from the obsession with long-term growth and began to look at decline and how policies designed to prevent it affect short-term growth in other countries.

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