Immiserizing Growth

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Immiserizing Growth


Immiserizing growth occurs if a technological improvement or an increase in the availability of a factor of production makes people more miserable in that it actually decreases the real output of an economy. It is often modeled as occurring because of structural rigidities in a model with international trade. Early exceptions, where immiserizing growth had domestic causes, come from classical and, perhaps, Marxist theories (Marx 18631883). David Ricardo (1817) introduced this possibility in a chapter entitled On Machinery that he added to his last edition of The Principles of Political Economy and Taxation. He provided an example where a technological improvement would reduce equilibrium output in the short run. In the long run, however, real output would rise (see Hicks 1969; Samuelson 1988; Shields 1989). Marx also discussed the possibility of economic crises brought on by a falling rate of profits and a rising rate of exploitation (see Shaikh and Tonak 1994).

In the neoclassical tradition, immiserizing growth is seen as a result of either policy distortions or market failures. The policy distortions might be domestic distortions such as distorted factor prices (Bhagwati 1969) or trade distortions such as tariffs (Johnson 1967). The most discussed possibility of immiserizing growth, both in the short run and in the long run, was developed and discussed by Jagdish Bhagwati (1969). It involves a decrease in the countrys terms of trade resulting from this growth, which is of sufficient magnitude to reduce the countrys real income. A country will export goods using its abundant factor. If the supply of this factor increases, the country will produce and export more of these export goods and produce less of other goods (the Rybczynski Theorem). Immiserizing growth can occur if this expansion in exports causes the prices for the countrys export goods to deteriorate enough to make it worse off with the increase in production. Whether or not a country might be likely to suffer from immiserizing growth depends on three conditions. First, the country must be driven to export. Second, changes in these exports need to have a large impact on the goods price, and the foreign demand for these exports needs to be inelastic so that a rise in exports leads to a decline in export earnings. Third, the country must be highly dependent on exports, and exports must be a high proportion of gross national product.

The export pessimism underlying the concept of immiserizing growth is an extreme form of the pessimism behind the structuralism of Raúl Prebisch (1964) and others. It implies some unlikely behavior of the exporting country. It implies no endogenous reaction to these declining terms of trade (Clarete and Whalley 1994). To see why this type of immiserizing growth is unlikely to occur, consider the situation of the major oil exporters such as Saudi Arabia and Kuwait. They seem to satisfy the conditions for immiserizing growth. They are clearly driven to export oil, as it dominates the economies of these countries. In addition, the countries are sufficiently important as suppliers that an increase in their exports will drive oil prices down. Since the demand for oil is highly inelastic, this increase in supply would dramatically reduce oil revenues. However, long-term immiserizing growth seems unlikely for these countries.

The very reason immiserizing growth may be unlikely for these countries is the very reason it is such a threat. It would be foolish for any supplier to do nothing in the face of dramatically declining terms of trade. The inelasticity of demand provides an incentive for suppliers to exercise monopoly power and to try to organize other suppliers into a cartel. Indeed this is what happened with the formation of the Organization of Petroleum Exporting Countries (OPEC). Far from being competitive suppliers with no power to control prices, the major oil exporters, individually and collectively, have considerable price control. They did not dramatically increase production when prices were low in a desperate but fruitless attempt to increase declining revenues.

Structuralists such as Prebisch and neo-Marxists (see Prebisch 1964; Frank 1967) emphasize that growth for small, less developed countries might harm these countries even if the demand for their countrys exports is highly elastic. Collectively, they may be selling into a market with inelastic demand. While it may seem to be in the interest of each country to expand its exports, collectively they may drive the price down to an extent that immiser-izing growth occurs.

SEE ALSO Bhagwati, Jagdish; Distortions; Exports; Heckscher-Ohlin-Samuelson Model; Machinery Question, The; Organization of Petroleum Exporting Countries (OPEC); Prebisch, Raúl; Prebisch-Singer Hypothesis; Ricardo, David; Rybczynski Theorem; Technological Progress, Economic Growth; Terms of Trade; Trade


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Michael P. Shields

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Immiserizing Growth

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