Perhaps one of the most surprising things about economic growth is how unusual it is historically. Before 1800, consistent economic growth was essentially unheard of anywhere in the world. From 1800-1900, economic growth was restricted to a few countries in Western Europe and offshoots. It's only in the past 30 years that a majority of the world's population have lived in countries that have experienced sustained economic growth.
Given these facts, there's a natural tendency to move from viewing growth as a natural state of an economy to something rare and mysterious. Yet the reality is that the growth rate for countries experiencing economic growth has been fairly stable. Countries near the technology frontier have enjoyed per-capita real growth on the order of 2% per year. This implies that per-capita output doubles approximately every 35 years. Countries below the technology frontier are able to grow quite a bit faster than this, with their upper potential growth rates increasing proportionally with how far they are below the technology frontier, although many poorer countries remain in no-growth or low-growth states.
Given this remarkable consistency, one wonders why the world went so long without enjoying economic growth. If growth of around 2% per year is possible with a fairly simple set of institutions, then why did it take so long for anyone to unlock its potential?
One potential answer may seem quite surprising -- perhaps economic policy was just really bad in all countries until two centuries ago, and in most countries until the last several decades. This may seem a surprising idea -- that we so consistently were shooting ourselves in the foot for so much of human history. Yet when you look at the countries that have experienced economic growth, you notice a remarkable consistency. Economic growth invariably corresponds to a basic level of openness, freedom, and stability. Where this is absent, so is growth. Where it is present, economic growth is as well.
Of course, this may be reverse causality at work. Perhaps there is a "poverty trap" argument for economic growth, in which poor countries require some large shock to "jump start" the growth engine. Perhaps once started growth inevitably changes the culture and empowers the masses, so that freedom and openness follow. Disentangling these alternative explanations is a difficult task, and as is so often the case they have very different policy implications.
Subscribe to:
Post Comments (Atom)
6 comments:
You mention a "simple set of institutions" intertwined with economic growth. Are these the same as the "openness, freedom, and stability" you mention later? Or do you actually mean social institutions like, say, a postal service?
If the former, are the questions of how to use economic policy in order to engender them the set, a subset, or a different set from the questions growth economics tries to answer?
Nick,
The word institution is used fairly broadly here. It basically refers to the "rules of the game" that prevail in society, whether they are enforced by a government authority, or by tradition and social stigma. The term can also refer to the organizations that enforce these rules.
Like all academic fields, economic growth is defined by its practice. Some people study institutional arrangements, although there is also a field called "institutional economics" that focuses on such things. I'm not terribly familiar with it I'm afraid.
Interesting analysis. Very few Americans truly have an accurate historical perspective about much of anything in this country.
Nice work. I came across your blog while “blog surfing” using the Next Blog button on the blue Nav Bar located at the top of my blogger.com site. I frequently just travel around looking for other blogs which exist on the Internet, and the various, creative ways in which people express themselves. Thanks for sharing.
I think it will be hard for industrial nations to keep the growing tendency because of the demographic change that is happening.
Post a Comment