The Independent, London, November 23, 1997 

On Long-Run Growth and Income Disparity Among Nations

(retitled "In Growth We Are Still Divided. Why?" by the newspaper)


Dan Ben-David

Tel Aviv University, Tel Aviv, Israel,
Centre for Economic Policy Research, London, England,
National Bureau for Economic Research, Cambridge, Mass., U.S.A.


Why is it that some countries are so rich and others so poor?  Did you know, for example, that in 1985 the average American made over 30% more than the average German, 40% more than the average Japanese, nearly 50% more than the average citizen of the United Kingdom, and 5,500% more than the average Ethiopian?  These calculations are made using what economists call purchasing power parities, or PPP's, to compare incomes across countries.  PPP's are much more accurate than official exchange rates,  However, when the latter are used to convert foreign output levels to a common dollar denomination, then the picture becomes even grimmer still. 

These gaps nearly defy the imagination.  A glimpse at average growth rates between 1960 and 1992 indicates that several of these income gaps are actually much smaller today than they once were, while many of the other gaps have grown substantially.  What is going on here?  What did some countries do that the other countries did not?  Are there "right" growth-enhancing policies that a country can implement to put it on the right track?  Or, is it just a matter of luck, i.e. being born in the right place with big piles of resources? 

Look who's rich: the U.S., Canada, the oil-exporters, etc.  So, maybe the explanation is luck.  If you have the natural resources, then you have it made.  But if that is true, then how does one explain Japan or Hong Kong?  In fact, if one wants to take the resource story even further, then how would it be possible to explain what happened in Argentina and Chile, who were among the wealthiest countries in the world over 100 years ago? 

Is it regional?  Maybe.  The Europeans happen to be almost uniformly wealthier than any other continent.  But why should that be?  If you look south across the Atlantic, then, a hundred years ago, South America might have been a continent that countries might have wanted to emulate.  What did they do wrong (if what they underwent could even be ascribed to policy)? 

And what about Asia?  One hundred years ago, who would have put Japan, Korea, Hong Kong, Thailand and some of the other east Asian countries among the world's leaders.  But look at them today.  And why go back just one hundred years?  What happened to the booming Chinese civilizations of the Ming dynasty, or the Mayans in Mexico, or the Romans, or the Greeks before them, or the Egyptians before them? 

Is it policy, or is it luck?  One might approach the whole issue of growth from an entirely  different perspective.  Rather than focus on this country or that, an alternative might be to focus on the growth of technology in general.  We could say that technology grows at some given rate all the time.  Countries that are at the leading edge grow at the rate that technology grows _ unless they mess up and fall back.  Under this assumption, technological progress just keeps right on going, regardless of who the leader is at any given point in time. 

As for countries that happened to have been way behind, they don't have to invent everything.  They can merely concentrate on copying things.  Surely that should make them grow relatively fast as they catch up to the leaders.  If one looks at the East Asians for example, one might be able to conclude that their seemingly miraculous growth rates cannot be sustained forever.  They merely reflect a catching up on the part of the countries.  Once they catch up, then they have to move from imitation to innovation, and then they will grow like everyone else that is at the forefront. 

So, maybe policy does have something to do with why growth rates may vary from country to country, and within countries over time.  But, is it reasonable to assume that the state of technology improves at a constant rate?  That is the assumption of the Solow growth model, which was the primary theoretical framework chosen by economists for thinking about the growth process until recently. 

Well, what would be the implications of this assumption?  The world's leading countries are currently growing at roughly 2% a year.  Suppose that we assume that this is the rate that the envelope is being pushed forward.  Is this really something that could have been constant since the dawn of time? 

One way to address this question is to extrapolate backwards.  At 2% average growth per year, the implication is that at the time that Columbus sailed westward in 1492, the average person in the wealthiest country in the world would have made less than $1 (in today's value) during an entire year.  You cannot sustain life by producing so little, hence it is clear that income levels must have been higher. 

But if that is the case, then incomes could not always have been increasing at a 2% rate.  Growth must have been substantially slower in the past and it must have been increasing over time.  People living 500 years ago lived in pretty much the same conditions as people living 1000 years ago.  It is only in the past couple of centuries that we have seen growth rates really starting to pick up. 

This is indeed consistent with the numbers that Angus Maddison finds.  Maddison determines the leading countries (in terms of labor productivity) over the past three centuries and calculates their productivity growth rates.  The Netherlands, which lead the world between 1700 and 1785, did not grow at all during this period.  By 1785, the country was overtaken by the United Kingdom, which attained productivity growth of one half of one percent during the years 1785-1820.  This increased to about one and a half percent from 1820 through 1890.  From that point, the United States assumed the lead and grew at an average rate of 2.3 percent. 

So two conclusions may be drawn.  The first is that fast growth is not a birthright.  Policies may be enacted that can move a country to the fast track, or to a lower, and possibly slower, growth path.  The second is that the technology envelope is not moving forward at a constant pace either.  It has gone from the near zero growth that persisted for centuries and even millennia, to roughly 2% annual growth in the century that we are now reaching the end of. 

It is probably not too hard to guess which types of policies most people would consider beneficial from a growth perspective and which types of policies might diminish a country's growth potential.  Educational attainment, adequate infrastructure, and preservation of property rights would most likely be among the important beneficial ingredients while corruption, waste and mismanagement of resources would probably be among the growth-diminishing country characteristics. 

What about international trade?  Could opening up to free trade provide a growth boost, or at least an improvement in income levels?  Or could the effects of opening up have a detrimental impact on output?  The notion that the dissemination of ideas is essential to the growth process would seem to be fairly intuitive.  Hence, any mechanism which might advance the flow of knowledge from one country to the next should provide a positive, or in the least, a non-negative spur to the development of countries.