Finding economic growth when there is no world outside

Imagine you were on an island.  It isn’t small, has plenty of resources and lots of people.  Despite this, society is divided.  There is wealth, there is poverty and there is significant unemployment.

The way to change this - to create jobs and reduce poverty - is through economic growth.  There must be more people producing more things, and more people must have more money to buy those things.  It is a virtuous circle.

Governments around the world are doing their best to ensure that they promote production at home and consumption abroad.  Yet not everyone can be a producer. 

Right now China and Germany are the world’s biggest producers while everyone depends on US consumers’ spending.  China is determined to maintain this status quo and is also one of the world’s biggest lenders, financing US consumer debt.

Now Americans can’t afford to borrow anymore.  All must be producers.  But all must also be consumers.

Global trade, we’re told, is unbalanced.  Possibly, but the planet is also alone and marooned in space.  We’re not yet trading with other life-forms in other solar-systems.  So you don’t have to imagine you’re on an island, you’re already on one.

Any solutions to poverty, unemployment, economic growth or job creation have to come from within this island.  There isn’t anywhere else.

So, where are the solutions?  How do you create economic growth if there aren’t sufficient consumers to generate demand for products that require new workers?

Part of the problem is in the artificial stimulus.  If a minimum wage is set, for instance, then that requires that a certain value of products be manufactured.  Expensive wages require expensive things.  But if the expensive wages are subsidised through taxation then that raises costs elsewhere.

One of the reasons both India and China, despite quite appalling poverty, have avoided the malnutrition and mortality rates of many parts of Africa is that subsistence livelihoods have continued even in the face of disruptive economic growth and unequal wealth distribution.

Allowing inequality, permitting informal economies; acknowledging that these are imperfect. 

Poverty is awful, but the path out is in allowing people to produce what they can, unaided, afford to buy.  If you think about it, we already put this into practice.

Americans and Europeans don’t try to improve the livelihoods or subsidise the wages of Chinese or Indian labourers.  Quite the opposite, they hide behind tariff and legislative walls that act to make things even more difficult for poor foreign workers.  Poverty in China has been very good for American shoppers who have subsequently created millions of new jobs in China.  China has become, in a very short time, the world’s second largest economy, second biggest exporter and biggest energy consumer.

But it was done by relying on outside consumers.  With America attempting to become a producer again China is going to have to develop a local consumer market.

Much of Africa faces even greater challenges.  Resource extraction employs few but – along with charity and aid – supports the bulk of the continent’s economies.

Angel Gurria, secretary general of the OECD club of wealthy nations, has been in South Africa.  He identified high local production costs and limited innovation, along with the usual demons of poor regulatory oversight and corruption, as holding back local economic development.  But take that from where it comes.  Gurria represents rich nations.  His idea of innovative start-ups is polished technology firms.

What South Africa needs are townships full of artisanal workers selling to each other, low-cost and labour-intensive factories and an acceptance that a poor country can’t pay beyond its development. 

The jobs created are likely to be unsafe, hostile to glamour and boring to both workers and politicians.  Similar routes have been traced by many of the Asian Tigers and by transformational economies in Latin America.

Remember, we’re on an island; there isn’t anywhere else.