INTRODUCTION TO MODERN ECONOMIC GROWTH contraction of its gDP per capita, so that in 2000 it is in fact poorer than it was in 1960. The patterns shown in Figure 1. 8 are what we would like to understand and explain. Why is the United States richer in 1960 than other nations and able to grow at a steady pace thereafter? How did Singapore, South Korea and Botswana manage to grow at a relatively rapid pace for 40 years? Why did Spain grow relatively rapidly for about 20 years, but then slow down? Why did Brazil and Guatemala stagnate during the 1980s? What is responsible for the disastrous growth performance of Nigeria? 1.4. Origins of Todays Income Differences and World Economic Growth These growth-rates differences shown in Figures 1.7 and 1.8 are interesting in their own right and could also be, in principle, responsible for the large differences in income per capita we observe today. But are they? The answer is No. Figure 1.8 shows that in 1960 there was already a very large gap between the United States on the one hand and India and Nigeria on the other. In fact some of the fastest-growing countries such as South Korea and botswana started out relatively poor in 1960 This can be seen more easily in Figure 1.9, which plots gDP per capita in 2000 versus gDP per capita in 1960, together with the 45 line. Most observations are around the 45 line, indicating that the relative ranking of countries has changed little between 1960 and 2000. Thus the origins of the very large income differences across nations are not to be found in the postwar era. There are striking growth differences during the postwar era, but the evidence presented so far suggests that the"world income distribution"has been more or less stable, with a slight tendency towards becoming more unequal If not in the postwar era, when did this growth gap emerge? The answer is that much of the divergence took place during the 19th century and early 20th century Figures 1.10, 1.11 and 1.13 give a glimpse of these 19th-century developments by using the data compiled by Angus Maddison for GDP per capita differences across nations going back to 1820(or sometimes earlier). These data are less reliable than Summers-Heston's Penn World tables, since they do not come from standardized national accounts. Moreover, the sample is more limited and does not include 14
Introduction to Modern Economic Growth contraction of its GDP per capita, so that in 2000 it is in fact poorer than it was in 1960. The patterns shown in Figure 1.8 are what we would like to understand and explain. Why is the United States richer in 1960 than other nations and able to grow at a steady pace thereafter? How did Singapore, South Korea and Botswana manage to grow at a relatively rapid pace for 40 years? Why did Spain grow relatively rapidly for about 20 years, but then slow down? Why did Brazil and Guatemala stagnate during the 1980s? What is responsible for the disastrous growth performance of Nigeria? 1.4. Origins of Today’s Income Differences and World Economic Growth These growth-rates differences shown in Figures 1.7 and 1.8 are interesting in their own right and could also be, in principle, responsible for the large differences in income per capita we observe today. But are they? The answer is No. Figure 1.8 shows that in 1960 there was already a very large gap between the United States on the one hand and India and Nigeria on the other. In fact some of the fastest-growing countries such as South Korea and Botswana started out relatively poor in 1960. This can be seen more easily in Figure 1.9, which plots GDP per capita in 2000 versus GDP per capita in 1960, together with the 45◦ line. Most observations are around the 45◦ line, indicating that the relative ranking of countries has changed little between 1960 and 2000. Thus the origins of the very large income differences across nations are not to be found in the postwar era. There are striking growth differences during the postwar era, but the evidence presented so far suggests that the “world income distribution” has been more or less stable, with a slight tendency towards becoming more unequal. If not in the postwar era, when did this growth gap emerge? The answer is that much of the divergence took place during the 19th century and early 20th century. Figures 1.10, 1.11 and 1.13 give a glimpse of these 19th-century developments by using the data compiled by Angus Maddison for GDP per capita differences across nations going back to 1820 (or sometimes earlier). These data are less reliable than Summers-Heston’s Penn World tables, since they do not come from standardized national accounts. Moreover, the sample is more limited and does not include 14
INTRODUCTION TO MODERN ECONOMIC GROWTH HKG ESP ISR/ oa ROM IDN CHN SaM 8 ETH TZA 6 log gdp per worker 1960 FIGURE 1. 9. Log gDP per worker in 2000 versus log gDP per worker in 1960. together with the 45 line observations for all countries going back to 1820. Finally, while these data do include a correction for PPP, this is far less reliable than the careful price comparisons used to construct the price indices in the Penn World tables. Nevertheless, these are the best available estimates for differences in prosperity across a large number of nations going back to the 19th century Figures 1.10 shows the estimates of the distribution of countries by gDP per capita in 1820, 1913(right before World War I)and 2000. To facilitate comparison the same set of countries are used to construct the distribution of income in each date. The distribution of income per capita in 1820 is relatively equal, with a very small left tail and a somewhat larger but still small right tail. In contrast, by 1913 there is considerably more weight in the tails of the distribution. by 2000, there are much larger differences 15
Introduction to Modern Economic Growth ARG AUT AUS BDI BEL BEN BFA BGD BOL BRA BRB CANCHE CHL CHN CIV CMR COG COL COM CPV CRI DNK DOM ECU EGY ESP ETH FINFRA GAB GBR GHA GIN GMB GNB GRC GTM HKG HND IDN IND IRL IRN ISR ISL ITA JAM JOR JPN KEN KOR LKA LSO LUX MAR MDG MEX MOZ MLI MUS MWI MYS NER NGA NIC NOR NLD NPL NZL PAK PAN PER PHL PRT PRY ROM RWA SEN SLV SWE SYC SYR TCD TGO THA TTO TUR TZA UGA URY USA VEN ZAF ZMB ZWE 7 8 9 10 11 12 log gdp per w orker 2 0 0 0 6 7 8 9 10 log gdp per worker 1960 Figure 1.9. Log GDP per worker in 2000 versus log GDP per worker in 1960, together with the 45◦ line. observations for all countries going back to 1820. Finally, while these data do include a correction for PPP, this is far less reliable than the careful price comparisons used to construct the price indices in the Penn World tables. Nevertheless, these are the best available estimates for differences in prosperity across a large number of nations going back to the 19th century. Figures 1.10 shows the estimates of the distribution of countries by GDP per capita in 1820, 1913 (right before World War I) and 2000. To facilitate comparison, the same set of countries are used to construct the distribution of income in each date. The distribution of income per capita in 1820 is relatively equal, with a very small left tail and a somewhat larger but still small right tail. In contrast, by 1913, there is considerably more weight in the tails of the distribution. By 2000, there are much larger differences. 15
INTRODUCTION TO MODERN ECONOMIC GROWTH 1820 1913 2000 6 FIGURE 1.10. Estimates of the distribution of countries according to log gdp per capita in 1820, 1913 and 2000 Figure 1.11 also illustrates the divergence; it depicts the evolution of average income in five groups of countries, Western Offshoots of Europe(the United States, Canada, Australia and New Zealand), Western Europe, Latin America, Asia and Africa. It shows the relatively rapid growth of the Western Offshoots and West Eu- ropean countries during the 19th century, while Asia and Africa remained stagnant and Latin America showed little growth. The relatively small income gaps in 1820 become much larger by 2000 Another major macroeconomic fact is visible in Figure 1.11: Western Offshoots and West European nations experience a noticeable dip in gDP per capita around 1929, because of the Great Depression. Western offshoots, in particular the United States, only recover fully from this large recession just before WWII. How an econ omy can experience such a sharp decline in output and how it recovers from such a 16
Introduction to Modern Economic Growth 1820 1913 2000 0 .5 1 1.5 D ensity of coutr ei s 4 6 8 10 12 log gdp per capita Figure 1.10. Estimates of the distribution of countries according to log GDP per capita in 1820, 1913 and 2000. Figure 1.11 also illustrates the divergence; it depicts the evolution of average income in five groups of countries, Western Offshoots of Europe (the United States, Canada, Australia and New Zealand), Western Europe, Latin America, Asia and Africa. It shows the relatively rapid growth of the Western Offshoots and West European countries during the 19th century, while Asia and Africa remained stagnant and Latin America showed little growth. The relatively small income gaps in 1820 become much larger by 2000. Another major macroeconomic fact is visible in Figure 1.11: Western Offshoots and West European nations experience a noticeable dip in GDP per capita around 1929, because of the Great Depression. Western offshoots, in particular the United States, only recover fully from this large recession just before WWII. How an economy can experience such a sharp decline in output and how it recovers from such a 16
INTRODUCTION TO MODERN ECONOMIC GROWTH Western offshoots g Latin America y Africa 1800 2000 FIGURE 1.11. The evolution of average gdP per capita in Western Offshoots, Western Europe, Latin America, Asia and Africa, 1820- 2000 shock are among the major questions of macroeconomics. While the great Depres- sion falls outside the scope of the current book, we will later discuss the relationship between economic crises and economic growth as well as potential sources of eco- A variety of other evidence suggest that differences in income per capita were even smaller once we go back further than 1820. Maddison also has estimates for average income per capita for the same groups of countries going back to 1000 AD We extend Figure 1.11 using these data; the results are shown in Figure 1. 12. while these numbers are based on scattered evidence and guesses, the general pattern is consistent with qualitative historical evidence and the fact that income per capita in any country cannot have been much less than $500 in terms of 2000 US dollars, since individuals could not survive with real incomes much less than this level, figure 1.12 17
Introduction to Modern Economic Growth Western Offshoots Western Europe Africa Latin America Asia 6 7 8 9 10 log gdp per capita 1800 1850 1900 1950 2000 year Figure 1.11. The evolution of average GDP per capita in Western Offshoots, Western Europe, Latin America, Asia and Africa, 1820- 2000. shock are among the major questions of macroeconomics. While the Great Depression falls outside the scope of the current book, we will later discuss the relationship between economic crises and economic growth as well as potential sources of economic volatility. A variety of other evidence suggest that differences in income per capita were even smaller once we go back further than 1820. Maddison also has estimates for average income per capita for the same groups of countries going back to 1000 AD. We extend Figure 1.11 using these data; the results are shown in Figure 1.12. While these numbers are based on scattered evidence and guesses, the general pattern is consistent with qualitative historical evidence and the fact that income per capita in any country cannot have been much less than $500 in terms of 2000 US dollars, since individuals could not survive with real incomes much less than this level. Figure 1.12 17
INTRODUCTION TO MODERN ECONOMIC GROWTH shows that as we go further back, the gap among countries becomes much smaller This further emphasizes that the big divergence among countries has taken place over the past 200 years or so. Another noteworthy feature that becomes apparent from this figure is the remarkable nature of world economic growth. Much evidence suggests that there was little economic growth before the 18th century and certainly almost none before the 15th century. Maddison's estimates show a slow but steady increase in West European gDP per capita between 1000 and 1800. This view is not shared by all historians and economic historians, many of whom estimate that there was little increase in income per capita before 1500 or even before 1800. For our purposes however, this is not central. What is important is that starting in the 19th or perhaps in the late 18th century, the process of rapid economic growth takes off in Western Europe and among the Western Offshoots. We owe our high levels of income today to this process of economic growth, and Figure 1. 12 shows that it also this process of economic growth that has caused the divergence among nations Figure 1. 13 shows the evolution of income per capita for United States, Britain, Spain, Brazil, China, India and Ghana. This figure confirms the patterns shown in Figure 1.11 for averages, with the United States Britain and Spain growing much faster than India and Ghana throughout. and also much faster than Brazil and China except during the growth spurts experienced by these two countries Overall on the basis of the available information we can conclude that the ori- gins of the current cross-country differences in economic performance in income per capita formed during the 19th century and early 20th century (perhaps during the late 18th century). This divergence took place at the same time as a number of countries in the world started the process of modern and sustained economic growth. Therefore understanding modern economic growth is not only interesting and important in its own right, but it also holds the key to understanding the causes of cross-country differences in income per capita today 1.5. Conditional Convergence We have so far documented the large differences in income per capita across nations, the slight divergence in economic fortunes over the postwar year and the 18
Introduction to Modern Economic Growth shows that as we go further back, the gap among countries becomes much smaller. This further emphasizes that the big divergence among countries has taken place over the past 200 years or so. Another noteworthy feature that becomes apparent from this figure is the remarkable nature of world economic growth. Much evidence suggests that there was little economic growth before the 18th century and certainly almost none before the 15th century. Maddison’s estimates show a slow but steady increase in West European GDP per capita between 1000 and 1800. This view is not shared by all historians and economic historians, many of whom estimate that there was little increase in income per capita before 1500 or even before 1800. For our purposes however, this is not central. What is important is that starting in the 19th or perhaps in the late 18th century, the process of rapid economic growth takes off in Western Europe and among the Western Offshoots. We owe our high levels of income today to this process of economic growth, and Figure 1.12 shows that it is also this process of economic growth that has caused the divergence among nations. Figure 1.13 shows the evolution of income per capita for United States, Britain, Spain, Brazil, China, India and Ghana. This figure confirms the patterns shown in Figure 1.11 for averages, with the United States Britain and Spain growing much faster than India and Ghana throughout, and also much faster than Brazil and China except during the growth spurts experienced by these two countries. Overall, on the basis of the available information we can conclude that the origins of the current cross-country differences in economic performance in income per capita formed during the 19th century and early 20th century (perhaps during the late 18th century). This divergence took place at the same time as a number of countries in the world started the process of modern and sustained economic growth. Therefore understanding modern economic growth is not only interesting and important in its own right, but it also holds the key to understanding the causes of cross-country differences in income per capita today. 1.5. Conditional Convergence We have so far documented the large differences in income per capita across nations, the slight divergence in economic fortunes over the postwar year and the 18