Draft: For Criticism Only

A NOTE ON THE COMPARABILITY OF GROWTH RATES

It has become a popular sport to compare growth rates in different countries and to draw conclusions as to the relative efficiency from the fact that one economy moves or does not move faster than another. There is obvious sense in such a comparison, though there are some dangers if it is forgotten that the aggregates which are calculated to measure growth rates depend on their meaning or the manner in which they are defined. In this note I want to draw attention to one pitfall in interpreting in particular growth rates of Soviet-type economies with those in our kind of economy to which as far as I am aware, insufficient attention has been drawn.

Aggregate concepts such as gross national product or industrial production are convenient and indeed essential summaries of developments which one wants to interpret or project, as the case may be. Even in the best of circumstances their value as a measure of the efficiency of a system is limited. Efficiency is in this case apparently defined primarily as the manner in which the economy succeeds in mobilizing its resources, and secondarily as the degree to which the economy succeeds in converting the mobilized resources into available output.

The latter requires, however, strictly speaking an analysis of the relation of inputs (cost) to outputs (benefits). Thus some obvious allowances have to be made for the growth and composition of the population and labor force. Or it should be pointed out, as it frequently is not, that even though the West and the East German economy have after 1950 grown roughly equally fast on a more of less comparable per capita basis, and even though the marginal capital output ratios of the two areas,

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calculated ex post have been roughly the same, and even though the investment ratios have become comparable, the East German capital formation contains less than 10% housing, while in the West German economy it contains about 25%.

Again, whether or not this spells efficiency or not depends on further details. Whenever one deals with one's own social and economic environment one makes "instinctive" allowances for the details that are necessary for the proper interpretation of aggregative conclusions. When one deals with social systems that are alien to one's own experiences, then instinctive safeguards work substantially less effectively if they work at all, and a conscious effort to master the underlying detail becomes essential.

I want now to discuss the international comparisons of growth rates. In particular, comparisons of growth rates in Soviet and non-Soviet economies has become a favorite pasttime of economists and non-economists alike. Yet, there are some aspects of the matter which limit the usefulness of such comparisons without substantial qualifications to which not sufficient attention is normally drawn. In order to get to the point, I have to go over some commonly agreed ground first.

Growth rates of GNP or national income are used to measure relative performance of economies. "Relative performance" is itself an ambiguous term. With rapid population growth aggregates may increase rapidly without corresponding developments on a per capita basis. Age distributions, length of working day, and many other aspects play a role, which it is not my intention to discuss.

When a scholar attempts to assess the growth of a Soviet type economy he is, as everyone knows, faced with the problem that while data on production in physical units may be reasonably plentiful, the incentives

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and the price system used in the Soviet-type countries defy rational interpretation even from the standpoint of these economies themselves. He is faced, therefore, with defining a useful concept and finding an interpretable weighting system. Various scholars have solved their problems in different though essentially similar ways. Conceptually the problem arises of what is production, what is double counting, and what are transfers, and scholars can quickly arrive at a definition where disagreements are both reasonable and marginal.

When it comes to finding a weighting system the difficulties that arise are substantially greater. I would argue that *any* internally consistent pricing system is an improvement over what is actually found in Soviet-type economies, even if the use of, say, American prices to measure Soviet growth does reflect our rather than their factor scarcities and consumer preferences. I have argued in my book that this is even more true for the use of West German prices to measure East German performance.

The discussion of these points is well known and will not be pursued further here. The point to be made is a different one and it arises only after the mentioned problems have been satisfactorily dealt with.

Take the GNP of just one country, say, the USA. A price system of a particular year is chosen, and then kept for a number of years to evaluate "real" developments. The further away one gets from the year chosen for the price weights, the louder demands for revaluation with more recent prices become on the grounds that the weighting system has become increasingly out-of-date. By the latter is presumably meant that it has ceased to reflect wither relative factor scarcities or consumer preferences. In making calculations in constant prices, one has really tried to eliminate the effects that come "from the side of money" in order to isolate effects that come " from the goods side"--shades of "neutral" money.

The implication is that what is measured is somehow physical
production, unaffected by price changes. A further implication, not
analyzed in this context but certainly intuitively allowed for is
that any changes in the physical production are the result of changes in
employment,
technology of
technical changes,
and changes in aggregate as well as individual demands.

Suppose for a moment--and the assumption is made solely to bring
out a particular point--that there has been no effect on output from
"the money side", and that unemployment or short hours have been no
problem. Physical outputs in individual lines of production will then
move in response to changes in relative prices and profitabilities.

This means that while the weighting system used to measure growth
in constant prices may be out of date, a certain amount of correction
is built into the calculation because the physical quantities weighted by
constant prices themselves have moved in response to changing prices
which in turn, and under the simplified assumptions made in the preceding
paragraph, reflect relative demands and scarcities. Thus it is possible
to read into the measurement of growth of GNP in constant prices
welfare and efficiency interpretations even when the price weights used
should be revised. That is so because the amounts that are being
produced in each time period are determined independently of the fixed
price weights and in a manner that can be interpreted in terms of welfare
and efficiency criteria.

There still remains a serious problem of interpretation particularly
of international comparisons, as Gilbert and Kravis have shown, but they
have also indicated how the problem may be handled.

All of this is clearly not so when we deal with growth in Soviet-type
economies. Physical outputs are certainly not determined by consumer
preferences. This is, of course, no criticism since communist economies,

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whether they want to give consumers a break or not, have no intention of
permitting their economies to be guided by consumer choices. However,
even in Soviet-type economies, outputs should at least reflect planner's
preferences and presumably relative factor scarcities.

If then the growth of outputs in physical terms reflects the
planner's preferences and if these preferences are sensible in the
sense of being internally consistent and suitable to achieve the overall
aims of the economy, it can be argued that the economy is efficient in
its own terms. The problem still remains that we might have been able
to do just as well with their product mix as they do, but chose not to
produce it, while they could not have done better than we did had they
chosen our product mix.

But suppose that the quantities produced were the "easy" ones to
produce and did not in fact reflect planners preferences? The question still
remains whether there is in the Soviet-type economies a self-correcting
mechanism corresponding to our (imperfect) price system which would
insure that the amounts produced are those that it was intended to produce.
If not, it is difficult to interpret growth rates even from the
standpoint of the Soviet-type economy, and in fact a high growth rate may
simply measure production of the wrong goods.

It becomes, therefore, necessary in interpreting growth rates to
know something of the planning methods and of the composition of production
compared with what is desired by the planners.

Targets are set frequently in physical terms as well as in value
terms. In addition prices are fixed in a manner which only at the final
consumer level allows, through variations in turnover taxes, to adjust
the available amounts to final demand at least to some extent. Usually
prices of investment goods are kept low relative to prices of consumer

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goods. This can be interpreted as reflecting planner's preferences.

However, though the price system is fixed, it has an effect on what is being produced even when it is expressly desired to avoid such an effect.

For example, in the East German economy whose working I know best,
there are physical targets set, but enterprises have to meet also both a
socalled gross production plan, and an assortment plan--to name only a few.
*targets*
The two are frequently inconsistent because of the prices used. The
assortment of goods produced in order to fulfill the gross production
plan differs substantially from the product mix called for by the
assortment plan. As the former stands higher in the hierarchy of plans,
it gets priority of fulfillment.

The result is that, although there is not in Soviet-type economies
built in the amount of self-correction into the growth of the physical
amounts produced in response to economic changes as there is in
the market economy, prices nevertheless have the effect that what is being
produced will maximize something like profits to the individual enterprise,
which however, differs from what the plan called for. In fact, it maximizes
what is easiest to produce, but this does not reflect necessarily better
consumer or planners' preferences.

It is therefore somewhat difficult to argue that the growth pattern
reflects what anyone wanted, and it is difficult to draw any kind of
welfare or efficiency conclusions from growth figures alone. The physical
growth may in fact hide a substantial amount of waste of effort, producing
goods noone wants--neither consumer nor producer nor planner--producing
them with indifferent efficiency and aggregating to an impressive growth
rate to nowhere.

The last sentence is an obvious overstatement. Nevertheless in
interpreting growth rates, the details of commodity composition are