Prosperity: The visible hand of leadership in driving sustained growth

Economic theories explain growth through capital, technology and institutions, but leadership may be the missing force that turns sound policies into sustained prosperity

What is the path to economic prosperity? The standard answers involve models, policies and plans. But to conclude that the right policies and models will automatically produce prosperity “is like believing that eggs, sugar, and flour will turn into cake if left overnight in a mixing bowl”, as Yuen Yuen Ang, a Singaporean political scientist and author of How China Escaped the Poverty Trap, puts it. Prosperity has to be willed and created. That raises a more fundamental question: Who will do it, and why? Curiously, development economics has never placed leadership at the centre of its explanation of prosperity even though leadership may determine whether a country takes the right economic and social decisions at the right time. 

Thinkers have long tried to explain why some nations become rich while others remain poor. David Hume, Adam Smith and David Ricardo regarded economic growth as central to political economy, but modern growth theory emerged only in the 1940s, with the Harrod-Domar model and later the Solow-Swan framework. Solow established that long-term growth depends on capital accumulation, labour and technological progress. From the 1980s, Paul Romer and Robert Lucas brought technology and knowledge creation into the model, emphasising innovation, research and development, human capital and learning-by-doing as sources of sustained growth. 

Institutional economists such as Douglass North, and later Daron Acemoglu and James Robinson, shifted attention to deeper determinants of growth: Property rights, governance, the rule of law, and political institutions. Running alongside these theories was the structuralist school, associated with Paul Rosenstein-Rodan, which argued that markets alone could not overcome coordination failures, economies of scale, and structural rigidities in poor countries. It advocated an active developmental state using industrial policy and public investment to accelerate industrialisation. 

The disappointing results of state intervention in much of the developing world, the debt crises of the 1980s, and the collapse of socialist economies then shifted the intellectual consensus towards markets. The Washington Consensus embodied this faith in the invisible hand: Liberalise, privatise, deregulate and maintain macroeconomic discipline. That too has proved incomplete. Notice what is missing from this intellectual history: Leadership. 

This is surprising because a large proportion of poor countries have systems that allow kleptocrats and entrenched elites to capture the state. No refinement of economic theory can deliver growth where political leaders are determined to milk the system for themselves. Leadership is the decisive variable in almost every organisation, social or corporate. Why should a country be different? Does anyone think Jamsetji Tata did not play a central role in creating the Tata empire or that Tesla and SpaceX would do equally well with someone other than Elon Musk heading them? Or that Deng Xiaoping and the complex system of choosing leaders played no role in China’s growth? 

Can this be determined with data? Economists Benjamin Jones and Benjamin Olken analysed random, exogenous deaths of national leaders in office, such as sudden heart attacks. By measuring economic performance immediately before and after a leader’s unexpected demise, their research found that executive leadership dramatically shifts growth rates in gross domestic product. Strangely, there are hundreds of books on leadership lessons from outstanding companies, but there are very few studies on what the leadership of successful countries like Singapore or South Korea can teach us. 

A 2010 World Bank paper titled “Leadership and Growth” offers some useful clues. Drawing on the experience of Singapore and the views of Goh Chok Tong, who served as Prime Minister from 1990 to 2004, it identifies three broad success factors: (1) Resources (natural endowment, inherited institutions and accumulation), (2) growth paradigm (wealth distribution vs wealth generation for example), and (3) formulation and effective execution of the right policies. Notice that empirical evidence shows that the third point can overcome everything else. We now know that far from being a mere backdrop to growth factors, executive leadership has been the primary driver of development in South Korea, Taiwan, Singapore and China. 

Even if a country is endowed with no natural resources (like Singapore) and does not start from a preconceived growth paradigm or inherited institutions, smart leaders can learn by doing, make course corrections, and transform their countries. Mr Goh emphasises that sustained growth is often the result of persistent finetuning of policies. This review process, through honest self-reflection against clearly defined benchmarks, provides the necessary accountability. What determines such policies, implementation and policy review? He identifies three factors — robust institutions, leadership and social consensus. Note that poor leadership cannot create the other two. 

This brings us to the crucial question. What are the attributes of a good leader? Mr Goh says leaders should be visionary and diligent, and selflessly devoted to national interests rather than to party or personal ones. For credibility, leaders must have integrity and be incorruptible (or have the incentives to remain so). Clearly, shifting an economy on to a path of sustained high growth demands radical choices: Creating better and better human capital, integrating into global markets, and continuously absorbing technology and fostering efficiency to keep infrastructure costs low. But these cannot happen on their own. It is leadership (honest, wise, visionary and committed to course correction) that makes it all happen. Empirical evidence says so. It is time for growth theories to catch up. 

The writer is cofounder of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers