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

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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 IAn 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 ITwo 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

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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

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The income of the average Japanese person

The income of the average Ghanaian person

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 in 1960 (1992 dollars); 101 countriesThere is no clear relation between the growth rate of output 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: OECD, Africa, and AsiaAsian countries are converging to OECD levels. There is no 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

1924-

Neoclassical growth model (1956, 1970).

Nobel prize - 1987