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The CHAPTER Reality of Economic Growth: History and Prospect
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Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Questions
What is modern economic growth? What was the post-1973 productivity slowdown?
What were its causes? Is the productivity slowdown now over?
Why are some nations so (relatively) rich and other nations so (relatively) poor?
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Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Questions
What policies can make economic growth faster? What are the prospects for successful and rapid economic development in tomorrows world?
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Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Looking Back into Deep Time
Up until 1500, there had been almost zero growth of output per worker After 1800, we see large sustained increases in worldwide standards of living
population growth accelerated output per capita grew
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Table 5.1 - Economic Growth through Deep Time
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Figure 5.1 - World Population Growth since 1000
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Premodern Economic Growth
Thomas R. Malthus
first academic professor of economics introduced the idea that increases in technology inevitably run into natural resource scarcity
implies that increases in technology lead to an increase in the size of the population but not to an increase in the standard of living
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The End of the Malthusian Age
Over time, the rate of technological progress rose
by 1500, it was sufficiently high so that natural resource scarcity could not surpass it sustained increases in the population and the productivity of labor followed
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The Demographic Transition
As material standards of living rise far above subsistence, countries undergo a demographic transition
birth rates rise death rates fall birth rates fall
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Figure 5.2 - Stylized Picture of the Demographic Transition
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The Demographic Transition
In the world today, not all countries have gone through their demographic transitions
Nigeria, Iraq, Pakistan, and the Congo are projected to have population growth rates greater than 2% per year over the next generation
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Figure 5.3 - Expected Population Growth Rates, 1997-2015
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Figure 5.3 - Expected Population Growth Rates, 1997-2015
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The Industrial Revolution
The industrial revolution began the era of modern economic growth
new technological leaps revolutionized industries and generated major improvements in living standards
Great Britain was the center of the industrial revolution
English became the worlds de facto second language
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The Industrial Revolution
The new technologies were not confined to Great Britain
spread rapidly to western Europe and the United States spread less rapidly to southern and eastern Europe and Japan
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Figure 5.4 - Industrialized Areas of the World, 1870
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American Long-Run Growth, 1800-1973
Growth in the second half of the nineteenth century was faster than it had been in the first half Growth accelerated further in the early part of the twentieth century
a second wave of industrialization occurred from new inventions and innovations
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American Long-Run Growth, 1800-1973
Growth slowed slightly during the Great Depression and World War II
1.4 percent per year from 1929 to 1950
Growth accelerated from 1950 to 1973
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Figure 5.5 - U.S. Measured Economic Growth: Real GDP per Worker 1995 Prices, 1890-1995
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American Long-Run Growth, 1800-1973
Many economists believe that official estimates of output per worker overstate inflation and understate real economic growth by 1 percent per year
national income accountants have a hard time valuing the boost to productivity and standards of living generated by new inventions
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American Long-Run Growth, 1800-1973
Structural changes also occurred
large drop in the proportion of the labor force working as farmers occurred new methods of travel were developed large number of innovative technologies and business practices were adopted
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American Long-Run Growth, 1800-1973
The U.S. became the worlds leader (in terms of technology) during the twentieth century because
the U.S. had an exceptional commitment to education the U.S. was the largest market in the world the U.S. was extraordinarily rich in natural resources
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American Economic Growth Since 1973
Between 1973 and 1995 measured output per worker grew at only 0.6 percent per year The other major industrial economies in western Europe, Japan and Canada also experienced a slowdown in productivity
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Table 5.3 - The Magnitude of the Post-1973 Productivity Slowdown in the G-7 Economies
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American Economic Growth Since 1973
Suggested causes of the productivity slowdown include
environmental protection measures increased problems of economic measurement the baby boom generation the tripling of world oil prices in 1973
The actual cause of the productivity slowdown remains a mystery
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American Economic Growth Since 1973
Slower economic growth has made Americans feel much less well off than they had expected that they would be
for some workers, the post-1973 productivity slowdown has been accompanied by stagnant or declining real wages increased income inequality has also occurred
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Figure 5.6 - Measured Real Mean Household Income, by Quintile
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American Economic Growth Since 1973
Since 1995, productivity growth in the U.S. has accelerated to a pace of 2.1 percent per year Investment began rising in 1992
business fixed investment grew at almost three times the rate of GDP
much of the additional investment has gone to purchase computers and related equipment
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Modern Economic Growth around the World
The industrial core of the world economy experienced a large increase in its level of material productivity and living standards during the nineteenth and twentieth centuries Elsewhere the growth of productivity levels and living standards was slower The world has become a more and more unequal place
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Figure 5.7 - World Distribution of Income Today, Selected Countries
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Figure 5.7 - World Distribution of Income Today, Selected Countries
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Modern Economic Growth around the World
The U.S. has not been the fastestgrowing economy in the world
a number of other countries at different levels of industrialization, development, and material productivity a century ago have now converged their current levels of productivity, economic structures, and standards of living are very close to those of the U.S.
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Figure 5.8 - Convergence among the G-7 Economies: Output per Capita as a Share of U.S. Level
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Modern Economic Growth around the World
The economies that have converged belong to the Organization for Economic Cooperation and Development (OECD)
group of countries that gave or received aid under the Marshall Plan to help rebuild or reconstruct after World War II
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The OECD countries adopted a common set of economic policies
Modern Economic Growth around the World
large private sectors free of government regulation of prices investment with its direction determined by profit-seeking businesses large social insurance systems to redistribute income governments committed to avoiding mass unemployment
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Modern Economic Growth around the World
The OECD countries ended up with mixed economies
markets direct the flow of resources governments stabilize the economy, provide social-insurance safety nets, and encourage entrepreneurship and enterprise
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Modern Economic Growth around the World
As the OECD countries became richer, they completed their demographic transitions The policy emphasis on free enterprise boosted investment Steady-state capital-output ratios rose Diffusion of technology from the U.S. occurred
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Modern Economic Growth around the World
Economic growth has not been limited to OECD countries
since World War II, several countries in east Asia have experienced stronger growth than has ever been seen anywhere in world history these successful east Asian countries are somewhat similar to the OECD economies in terms of economic policy and structure
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Modern Economic Growth around the World
Many countries have not been so fortunate Countries that have been ruled by communists in the twentieth century have remained poor
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Figure 5.9 - The Iron Curtain
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Table 5.4 - The Iron Curtain: GDP-per-Capita Levels of Matched Pairs of Countries
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Sources of Divergence
The principal cause of the large variation in output per worker between countries today are differences in their steady-state capital-output ratios
differences in the share of investment in national product difference in labor force growth
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Sources of Divergence
A second cause of the large variation in output per worker between countries today are differences in the level of education
the efficiency of labor is highly correlated with the level of education
educated workers can use modern technologies
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Figure 5.10 - GDP-per-Worker Levels and Average Years of Schooling
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Sources of Divergence
An additional cause of the large variation in output per worker between countries today are differences in access to technology
difficult to measure
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Cause and Effect, Effect and Cause
High population growth and low output per worker go together
rapid population growth reduces the steady-state capital-output ratio poor countries have not undergone their demographic transition
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Cause and Effect, Effect and Cause
Other vicious circles can occur
poor countries will have a high relative price of capital
implies that poor countries get less investment out of any given effort at saving
good education is harder to provide in poor countries
Setting the demographic transition in motion will offset these problems
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Hopes for Convergence
The context of economic stagnation and failure are relative terms
net national product in Argentina is about three times what it was in 1900 net national product in Norway is about nine times what it was in 1900
The worlds industrial leaders provide a benchmark of how much better things could have been
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Hopes for Convergence
Differences in productivity and living standards between national economies should be eroded over time due to
world trade migration flows of capital developing countries entering the demographic transition
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Policies for Saving, Investment, and Education
Policies to boost saving include
ensuring that savers get a reasonable rate of return on their savings minimizing restrictions on entrepreneurship keeping inflation low keeping government deficits to a minimum
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Policies for Saving, Investment, and Education
Policies to boost investment for a given level of savings include
welcoming money from foreign investors allowing businesses to freely earn and spend foreign exchange
reducing tariffs and quotas subsidizing investment and expansion by businesses that successfully compete in world markets
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Policies for Saving, Investment, and Education
Promoting universal access to education can provide two important benefits
a better-educated workforce is likely to be more productive educated women will likely pursue opportunities outside the home
the birth rate will likely fall the demographic transition will occur more quickly
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Policies for Technological Advance
Technological progress has two components
science research and development
amounts to 3 percent of GDP in the U.S.
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Policies for Technological Advance
Businesses conduct investments in research and development to increase profit Research and development is a public good
other firms can copy it patents limit the ability of other firms to do so
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Policies for Technological Advance
Governments seeking to establish patent laws face a dilemma
if the patent laws are strong, much of the modern technology in the economy will be restricted in use if the patent laws are weak, profits that innovators and inventors can earn will be low
pace of technological im...