INTRODUCTION TO MODERN ECONOMIC GROWTH USA LUX ZAEAB 6 log gdp per capita 2000 FIGURE 1.6. The association between income per capita and life ex- pectancy at birth in 2000 tables, while data on life expectancy at birth are available from the World Bank Development Indicators These figures document that income per capita differences are strongly associ- ated with differences in consumption(thus likely associated with differences in living standards) and health as measured by life expectancy. Recall also that these num- bers refer to PPP-adjusted quantities, thus differences in consumption do not(at least in principle) reflect the fact that the same bundle of consumption goods costs different amounts in different countries. The ppp adiustment corrects for these differences and attempts to measure the variation in real consumption. Therefore the richest countries are not only producing more than thirty-fold as much as the poorest countries, but they are also consuming thirty-fold as much. Similarly, cross- country differences in health are nothing short of striking; while life expectancy at 9
Introduction to Modern Economic Growth ALB ARG ARM AUS AUT AZE BDI BEL BEN BFA BGD BGR BLR BLZ BOL BRA BRB CAN CHE CHL CHN CIVCMR COG COL COM CPV CRI CZE DNK DOM DZA ECU EGY ESP EST FIN FRA GAB GBR GEO GHA GIN GMB GNB GNQ GRC GTM HKG HND HRV HUN IDN IND IRL IRN ISL ISR ITA JAM JOR JPN KAZ KEN KGZ KOR LBNLCA LKA LSO LTU LUX LVA MAC MAR MDA MDG MEX MKD MLI MOZ MUS MWI MYS NER NGA NIC NLDNOR NPL NZL PAK PAN PHL PER POL PRT ROMPRY RUS RWA SEN SLV SVK SVN SWE SWZ SYR TCD TGO THA TJK TTO TUN TUR TZA UGA UKR URY USA VCT VEN YEM ZAF ZMB ZWE ETH 4 0 5 0 6 0 7 0 8 0 9 0 life e xpectancy 2 0 0 0 6 7 8 9 10 11 log gdp per capita 2000 Figure 1.6. The association between income per capita and life expectancy at birth in 2000. tables, while data on life expectancy at birth are available from the World Bank Development Indicators. These figures document that income per capita differences are strongly associated with differences in consumption (thus likely associated with differences in living standards) and health as measured by life expectancy. Recall also that these numbers refer to PPP-adjusted quantities, thus differences in consumption do not (at least in principle) reflect the fact that the same bundle of consumption goods costs different amounts in different countries. The PPP adjustment corrects for these differences and attempts to measure the variation in real consumption. Therefore, the richest countries are not only producing more than thirty-fold as much as the poorest countries, but they are also consuming thirty-fold as much. Similarly, crosscountry differences in health are nothing short of striking; while life expectancy at 9
INTRODUCTION TO MODERN ECONOMIC GROWTH birth is as high as 80 in the richest countries, it is only between 40 and 50 in many sub-Saharan African nations. These gaps represent huge welfare differences Understanding how some countries can be so rich while some others are so poor is one of the most important, perhaps the most important, challenges facing social science. It is important both because these income differences have ma jor welfare consequences and because a study of such striking differences will shed light on how economies of different nations are organized, how they function and sometimes how they fail to function The emphasis on income differences across countries does not imply, however that income per capita can be used as a"sufficient statistic"for the welfare of the average citizen or that it is the only feature that we should care about. As we will discuss in detail later, the efficiency properties of the market economy(such as the celebrated First Welfare Theorem or Adam Smith's invisible hand)do not imply that there is no conflict among individuals or groups in society. Economic growth is generally good for welfare, but it often creates"winners"and"losers " And major dea in economics, Joseph Schumpeter's creative destruction, emphasizes precisely this aspect of economic growth; productive relationships, firms and sometimes indi vidual livelihoods will often be destroyed by the process of economic growth. This creates a natural tension in society even when it is growing. One of the important lessons of political economy analyses of economic growth, which will be discussed in the last part of the book, concerns how institutions and policies can be arranged so that those who lose out from the process of economic growth can be compensated or perhaps prevented from blocking economic progress A stark illustration of the fact that growth does not mean increase in the liv ing standards of all or most citizens in a society comes from South Africa under apartheid. Available data illustrate that from the beginning of the 20th century un til the fall of the apartheid regime, gDP per capita grew considerably, but the real wages of black South Africans, who make up the majority of the population, fell dur ing this period. This of course does not imply that economic growth in South Africa was not beneficial. South Africa still has one of the best economic performances in sub-Saharan Africa. Nevertheless, it alerts us to other aspects of the economy and also underlines the potential conficts inherent in the growth process. These aspects 10
Introduction to Modern Economic Growth birth is as high as 80 in the richest countries, it is only between 40 and 50 in many sub-Saharan African nations. These gaps represent huge welfare differences. Understanding how some countries can be so rich while some others are so poor is one of the most important, perhaps the most important, challenges facing social science. It is important both because these income differences have major welfare consequences and because a study of such striking differences will shed light on how economies of different nations are organized, how they function and sometimes how they fail to function. The emphasis on income differences across countries does not imply, however, that income per capita can be used as a “sufficient statistic” for the welfare of the average citizen or that it is the only feature that we should care about. As we will discuss in detail later, the efficiency properties of the market economy (such as the celebrated First Welfare Theorem or Adam Smith’s invisible hand) do not imply that there is no conflict among individuals or groups in society. Economic growth is generally good for welfare, but it often creates “winners” and “losers.” And major idea in economics, Joseph Schumpeter’s creative destruction, emphasizes precisely this aspect of economic growth; productive relationships, firms and sometimes individual livelihoods will often be destroyed by the process of economic growth. This creates a natural tension in society even when it is growing. One of the important lessons of political economy analyses of economic growth, which will be discussed in the last part of the book, concerns how institutions and policies can be arranged so that those who lose out from the process of economic growth can be compensated or perhaps prevented from blocking economic progress. A stark illustration of the fact that growth does not mean increase in the living standards of all or most citizens in a society comes from South Africa under apartheid. Available data illustrate that from the beginning of the 20th century until the fall of the apartheid regime, GDP per capita grew considerably, but the real wages of black South Africans, who make up the majority of the population, fell during this period. This of course does not imply that economic growth in South Africa was not beneficial. South Africa still has one of the best economic performances in sub-Saharan Africa. Nevertheless, it alerts us to other aspects of the economy and also underlines the potential conflicts inherent in the growth process. These aspects 10
INTRODUCTION TO MODERN ECONOMIC GROWTH 8 1960 1980 2000 average growth rates FIGURE 1.7. Estimates of the distribution of countries according to the growth rate of gDP per worker(PPP-adjusted) in 1960, 1980 and are not only interesting in and of themselves, but they also inform us about why certain segments of the society may be in favor of policies and institutions that do not encourage growth 1. 3. Economic growth and Income differences How could one country be more than thirty times richer than another? The answer lies in differences in growth rates. Take two countries, A and B, with the same initial level of income at some date. Imagine that country a has 0% growth per capita, so its income per capita remains constant, while country B grows at 2% per capita. In 200 years'time country B will be more than 52 times richer than country A. Therefore, the United States is considerably richer than Nigeria because it has grown steadily over an extended period of time, while Nigeria has not(and 11
Introduction to Modern Economic Growth 1960 1980 2000 0 5 10 15 2 0 D ensity of coutr ei s -.1 -.05 0 .05 .1 average growth rates Figure 1.7. Estimates of the distribution of countries according to the growth rate of GDP per worker (PPP-adjusted) in 1960, 1980 and 2000. are not only interesting in and of themselves, but they also inform us about why certain segments of the society may be in favor of policies and institutions that do not encourage growth. 1.3. Economic Growth and Income Differences How could one country be more than thirty times richer than another? The answer lies in differences in growth rates. Take two countries, A and B, with the same initial level of income at some date. Imagine that country A has 0% growth per capita, so its income per capita remains constant, while country B grows at 2% per capita. In 200 years’ time country B will be more than 52 times richer than country A. Therefore, the United States is considerably richer than Nigeria because it has grown steadily over an extended period of time, while Nigeria has not (and 11
INTRODUCTION TO MODERN ECONOMIC GROWTH USA South Korea raz Singapore 8 Guatemala g Botswana ndia FiGure 1.8. The evolution of income per capita in the United States United Kingdom, Spain, Singapore, Brazil, Guatemala, South Korea, Botswana. Nigeria and India. 1960-2000 we will see that there is a lot of truth to this simple calculation; see Figures 1.8, 1.11and1.13) In fact, even in the historically-brief postwar era, we see tremendous differences in growth rates across countries. This is shown in Figure 1.7 for the postwar era which plots the density of growth rates across countries in 1960, 1980 and 2000. The growth rate in 1960 refers to the(geometric) average of the growth rate between 1950 and 1969, the growth rate in 1980 refers to the average growth rate between 1970 and 1989 and 2000 refers to the average between 1990 and 2000(in all cases subject to data availability; all data from Penn World tables ). Figure 1.7 shows that in each time interval, there is considerable variability in growth rates: the crOss-country distribution stretches from negative growth rates to average growth rates as high as 10% a year
Introduction to Modern Economic Growth Spain South Korea India Brazil USA Singapore Nigeria Guatemala UK Botswana 6 7 8 9 10 log gdp per capita 1960 1970 1980 1990 2000 year Figure 1.8. The evolution of income per capita in the United States, United Kingdom, Spain, Singapore, Brazil, Guatemala, South Korea, Botswana, Nigeria and India, 1960-2000. we will see that there is a lot of truth to this simple calculation; see Figures 1.8, 1.11 and 1.13). In fact, even in the historically-brief postwar era, we see tremendous differences in growth rates across countries. This is shown in Figure 1.7 for the postwar era, which plots the density of growth rates across countries in 1960, 1980 and 2000. The growth rate in 1960 refers to the (geometric) average of the growth rate between 1950 and 1969, the growth rate in 1980 refers to the average growth rate between 1970 and 1989 and 2000 refers to the average between 1990 and 2000 (in all cases subject to data availability; all data from Penn World tables). Figure 1.7 shows that in each time interval, there is considerable variability in growth rates; the cross-country distribution stretches from negative growth rates to average growth rates as high as 10% a year. 12
INTRODUCTION TO MODERN ECONOMIC GROWTH Figure 1. 8 provides another look at these patterns by plotting log gDP per capita for a number of countries between 1960 and 2000 (in this case, we look at GDP per capita instead of gDP per worker both for data coverage and also to make the figures more comparable to the historical figures we will look at below). At the top of the figure, we see the US and the UK gDP per capita increasing at a steady pace, with a slightly faster growth for the United States, so that the log("proportional gap between the two countries is larger in 2000 than it is in 1960. Spain starts much poorer than the United States and the UK in 1960, but grows very rapidly between 1960 and the mid-1970s, thus closing the gap between itself and the United States and the UK. The three countries that show very rapid growth in this figure are Singapore, South Korea and Botswana. Singapore starts much poorer than the UK and Spain in 1960, but grows very rapidly and by the mid-1990s it has become richer than both (as well as all other countries in this picture except the United States). South Korea has a similar trajectory, but starts out poorer than Singapore and grows slightly less rapidly overall, so that by the end of the sample it is still little poorer than Spain. The other country that has grown very rapidly is the African success story" Botswana, which was extremely poor at the beginning of the sample. The rapid growth, especially after 1970 has taken Botswana to the ranks of the middle-income countries by 2000 The two Latin American countries in this picture, Brazil and Guatemala, il- lustrate the often-discussed Latin American economic malaise of the postwar era. Brazil starts out richer than Singapore, South Korea and Botswana, and has a rela tively rapid growth rate between 1960 and 1980. But it experiences stagnation from 1980 onwards, so that by the end of the sample all three of these countries have become richer than Brazil. Guatemala's experience is similar, but even mo Contrary to Brazil, there is little growth in Guatemala between 1960 and 1 no growth between 1980 and 2000 Finally, Nigeria and India start out at similar levels of income per capita as Botswana, but experience little growth until the 1980s. Starting in 1980, the Indian economy experiences relatively rapid growth, but this has not been sufficient for its income per capita to catch up with the other nations in the figure. Nigeria, on the other hand, in a pattern all-too-familiar in sub-Saharan Africa, experiences a 13
Introduction to Modern Economic Growth Figure 1.8 provides another look at these patterns by plotting log GDP per capita for a number of countries between 1960 and 2000 (in this case, we look at GDP per capita instead of GDP per worker both for data coverage and also to make the figures more comparable to the historical figures we will look at below). At the top of the figure, we see the US and the UK GDP per capita increasing at a steady pace, with a slightly faster growth for the United States, so that the log (“proportional”) gap between the two countries is larger in 2000 than it is in 1960. Spain starts much poorer than the United States and the UK in 1960, but grows very rapidly between 1960 and the mid-1970s, thus closing the gap between itself and the United States and the UK. The three countries that show very rapid growth in this figure are Singapore, South Korea and Botswana. Singapore starts much poorer than the UK and Spain in 1960, but grows very rapidly and by the mid-1990s it has become richer than both (as well as all other countries in this picture except the United States). South Korea has a similar trajectory, but starts out poorer than Singapore and grows slightly less rapidly overall, so that by the end of the sample it is still a little poorer than Spain. The other country that has grown very rapidly is the “African success story” Botswana, which was extremely poor at the beginning of the sample. The rapid growth, especially after 1970 has taken Botswana to the ranks of the middle-income countries by 2000. The two Latin American countries in this picture, Brazil and Guatemala, illustrate the often-discussed Latin American economic malaise of the postwar era. Brazil starts out richer than Singapore, South Korea and Botswana, and has a relatively rapid growth rate between 1960 and 1980. But it experiences stagnation from 1980 onwards, so that by the end of the sample all three of these countries have become richer than Brazil. Guatemala’s experience is similar, but even more bleak. Contrary to Brazil, there is little growth in Guatemala between 1960 and 1980, and no growth between 1980 and 2000. Finally, Nigeria and India start out at similar levels of income per capita as Botswana, but experience little growth until the 1980s. Starting in 1980, the Indian economy experiences relatively rapid growth, but this has not been sufficient for its income per capita to catch up with the other nations in the figure. Nigeria, on the other hand, in a pattern all-too-familiar in sub-Saharan Africa, experiences a 13