PARTH J SHAH
The Economic Times June 20, 2002
After a conference in Bali, Parth J Shah is convinced that economic freedom, not old-fashioned theories of sustainable development, is the key to prosperity and growth.
As my colleague and I walked down towards immigration at the airport in Bali, we saw a large banner which read, 'Welcome Delegates.' Before we could absorb the pleasant surprise of being welcomed by the government of Indonesia, we spotted the rest of the message, which clarified that the welcome was for delegates to a meeting for the World Summit on Sustainable Development.
Wrong number. We were in Bali for a meeting of the Asian Economic Freedom Network (AEFN) organised by Friedrich Naumann Stiftung. The purpose of the meeting was to discuss the World Economic Freedom Index created and computed by the Fraser Institute in Canada and to assess its findings for Asia.
The contrast between the two meetings is instructive. There is a vast difference in the fundamental concepts, principles and policies that were discussed at the two meetings. Economic freedom refers to the freedom to engage in economic activity without interference from the government as long as the freedom of others is respected. The delegates at the AEFN meeting discussed what empirical variables capture this idea and what policy changes are required to increase economic freedom.
'Sustainable development', discussed at the other meeting, begs some fundamental questions: sustainable for how long? For whom? And what is it that we're trying to sustain?
Are we to sustain the amount and distribution of natural resources that exist today for future generations? Or the current standards of living, the amount and distribution of material goods and services? Should we sustain whatever it is that we agree to sustain only for future generations of Homo sapiens or also for other species of flora and fauna? And how long are we planning to sustain these-ten generations, a hundred, or longer?
The absurdity of the concept becomes clearer with a hypothetical example. Suppose we live in a period when charcoal is the main source of energy in the world. Charcoal is made by burning wood and destroy forests and ecosystems and generate greenhouse gases. This world does not seem sustainable.
So, the Charcoal World Summit for Sustainable Development is called by concerned international agencies, NGOs, and businesses. The heads of state and governments present at the summit agree on time-bound targets to reduce charcoal use and production of greenhouse gases, to offer official assistance to less developed countries, and to subsidise the discovery of alternative fuels.
A Charcoal Summit could have occurred about 150 years ago when Malthus' worries about population growth overtaking production were prevalent. The dire predictions of Malthus did not come true. A world powered by charcoal can't sustain 6 billion people. Would subsidies for the discovery of alternative fuels have reached the right individuals and would they have found coal, petroleum, solar and wind power or fuel cells? Given the history of government subsidy programs, it seems quite unlikely.
I am thankful that no Charcoal Summit took place 150 years ago, that we didn't have too many concerned agencies and NGOs then, that we were allowed to grope our way and discover new fuels. The forces of supply and demand are more powerful than any bribes by governments in focussing human ingenuity to solve problems.
Market forces took us from whale oil, to charcoal, to coal, to petroleum. The forest cover in the industrialised world today is higher than it was 150 years ago, and large quantities of coal are lying underground. No one can predict what will be the next source of energy, but the historical achievements of the human mind give us great confidence that we will have it well before any emergency. Then large quantities of petroleum will be left underground and future generations will grin about how primitive our energy sources were in the 21st century.
It covers all that the humanity would have ever wanted: gender equality, racial harmony, fair income, equitable access to education, healthcare, water, sanitation, including the mandate to reduce by half, by the year 2015, the proportion of the world's people whose income is less than $1 a day and the proportion of people who suffer from hunger and, by the same date, to halve the proportion of people without access to safe drinking water. The market keeps producing prosperity and the commissions keep setting target dates.
The consequences of the edicts of the final Johannesburg meeting in late August would resemble those of our hypothetical Charcoal Summit. The difference would be of magnitude, but the pattern would remain the same. Fundamentally, ecology and economy are similar-none can stay stagnant for long, it must either grow or decline. The choice is between a growing and a declining economy.
The most critical ingredient for economic growth is economic freedom. The Fraser study concludes that no country with a persistently high economic freedom rating during the last 20 years failed to achieved a high level of income. All 17 countries in the most-improved category experienced average per capita GDP growth of 2.7%. In contrast, all 16 countries which declined the most on the index of economic freedom declined at an annual rate of 0.6%.
As incomes increase, people demand higher quality, of housing, education, healthcare, and environment. At higher incomes - studies suggest above per capita income of $2,000 - people begin to invest in the quality air and water, sanitation, visits to parks and wildlife. The vision underlying the two meetings in Bali was antithetical. We don't need sustainable development, but sustained development. For the sake of humanity the next official welcome should be for delegates of the World Summit on Economic Freedom.
New Delhi, June 20, 2002
Copyright © 2002 The Economic Times
All Rights Reserved.