Transcript Economic Growth in the Long Run – the Facts

Economic Growth in the Long
Run – the Facts
Growth in the (now) Rich Countries
U.S. GDP
Since 1890
Aggregate U.S. output
has increased by a
factor of 43 since
1890.
The logarithmic scale on the vertical axis allows for the same proportional
increase in a variable to be represented by the same distance.
A Growth History of the World
Real Income per Person
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
0
500
1000
Years
1500
2000
Definitions
Output per capita = GDP divided by
population
Standard of living depends on (among
other things) the evolution of output per
capita.
Purchasing power parity (PPP) =
adjustment when comparing output figures
across countries.

The Penn World Tables
Human Development Index
Growth in Modern Times
A Tale of Two Countries
or, why is growth important…
The outlook for country I
An Australian expert observed that “time was no
object” for this country’s “easy-going” workers. Their
managers said “it was impossible to change the
habits of national heritage.”
“The[y]…are a happy race, and being content with
little, are not likely to achieve much.”
Foreign Affairs said this country’s economy was
“extremely weak.”
A journalist didn’t see “how she can by her own
unaided efforts build up her resources even to a
modest standard.”
The outlook for country I
Two US officials on an aid mission in March
1950 said this country would have trouble
competing on world markets.
They suggested it might try selling its
“knickknacks” to other developing countries.
The US secretary of state in November 1954
held up a cheap shirt from this country as
evidence how far they were behind.
Here is country I’s growth:
The income of the average person in
Country I, 1945-96
22000
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
1994
1987
1980
1973
1966
1959
1952
1945
0
Country I is:
Japan
Outlook for country II
(circa 1950)
“Few former colonies can have had a
more auspicious start.”
“Surfacing the road from Tarkwa to
Takoradi would increase total output” by
much more “than applying the same
materials to almost any road in the
United Kingdom.”
Akosombo Dam Project in early 1960s
Hydroelectric dam to power aluminum
smelter
Alumina refinery processing bauxite from
local mines
Caustic soda plant and railways
Fishery on Lake Volta
North-South transportation on Lake Volta
Irrigated agriculture
Akosombo Dam Project in the 1990s
“There is no bauxite mine nor alumina
refinery nor caustic soda plant nor
railways.”
The irrigation projects and lake fishery
were “plagued by poor administration
and mechanical equipment failures.”
The lake transport “ended up in
complete failure.”
Lake-dwellers suffered water-borne
disease
The sad part is ...
The Akosombo Dam project was the
most successful project in Ghana’s
history.
The real tragedy is that Ghana stagnated for 50
years
Two Income Paths, 1945-96
22000
20000
18000
16000
The income of the
average Japanese person
14000
12000
10000
8000
6000
4000
2000
The income of the
average Ghanaian
person
0
1945 1953 1961 1969 1977 1985 1993
So what?????
So what????
Three-quarters of Ghanaians have no
access to health care; all Japanese do.
Forty percent of all Ghanaians do not have
access to clean drinking water; all
Japanese do.
Half of all Ghanaian women cannot read;
all Japanese women can.
Ghanaian mothers are 91 times more likely
to die in childbirth than Japanese mothers.
As William Easterly puts it…
Nothing is more important than seeing
poor countries grow
Nothing is more important than seeing
poor countries grow
Nothing is more important than seeing
poor countries grow
As Robert Lucas puts it…
“Once you start thinking about growth it is
difficult to think about anything else…”
Incomes around the World
One possible solution:
CONVERGENCE
Convergence? (take 1)
Convergence? (take 2)
Growth Rate of
GDP per Capita
1960-1992,
Versus GDP per
Capita
There is in
no 1960
clear
(1992 dollars);
relation
between the
growth
rate of output
101 countries
since 1960 and the
level of output per
capita in 1960.
Convergence? (take 3)
Growth Rate of
GDP per Capita
1960-1992,
Versus GDP per
Capita
in 1960:
Asian countries
are
OECD, Africa,
and
converging
to OECD
levels. There is no
Asia
evidence of
convergence for
African countries.
The four triangles on the top left corner correspond to the four tigers:
Singapore, Taiwan, Hong Kong, and South Korea. All four have had average
annual growth rates of GDP per capita in excess of 6% over the last 30
years.
Convergence?
(take 4)
Another possible solution:
FOREIGN AID
Aid Volumes (in)
Aid Volumes (out)
But does Aid Help?
Thinking About Growth: A Primer
To think about the facts presented in the
previous slides, we use the framework
of analysis developed by Robert Solow
Particularly:
What determines growth?
 What is the role of capital accumulation?
 What is the role of technological progress?

Robert Solow
1924Neoclassical growth
model (1956, 1970).
Nobel prize - 1987