There's No Such Thing as an Economic Miracle
One of the less heralded truths of economics is that growth miracles, while they make for good press, are overrated. It’s an insight that could help us better understand the outlook for developing countries such as China.
Most of the world’s wealthiest and best-governed countries got there without super-rapid bursts of growth. Denmark, which has a per capita income of about $52,000 and is frequently ranked as one of the happiest countries in the world, never experienced what anyone would call an economic miracle. If you Google that phrase, the main entry will be a research piece detailing how, in the 1990s, the country lowered its unemployment rate without having to dismantle its welfare state.
Denmark’s overall economic record is gloriously boring. From 1890 to 1916, per capita growth averaged about 1.9 percent per year, and if in 1916 you had forecast that this pace would continue for another 100 years, you would have been off by only about $200. Denmark had positive growth about 84 percent of the time and no deep recessions, according to a recent study by Lant Pritchett and Lawrence Summers.
Or consider the U.S., where per capita income surpassed Latin America in the 19th century --thanks mainly to the latter’s stagnation. U.S. growth rates at the time were typically below 2 percent, and even lower up through 1860, hardly impressive by the standards of today’s China or India -- or for that matter today’s U.S. The big advantage of the U.S. is that it avoided major catastrophe for long periods of time, apart from the Civil War, and pushed ahead with fairly steady progress.
The 19th-century Latin American stagnation, aside from wasting valuable time, left much of the region with weaker infrastructure, poor educational systems and a more dysfunctional politics. All of this made rapid catch-up harder in the 20th century.
Slow growth doesn’t mean that the U.S. or Denmark were failures in the 19th century. It’s hard for economies at or near the technological frontier to rapidly improve living standards, because invention is usually slower than playing catch-up by borrowing technologies from wealthier nations. Such borrowing of know-how, along with exports and rapid investments in education and infrastructure, is what later allowed the Asian tigers of Japan, South Korea, Taiwan, Hong Kong, Singapore and China to achieve growth rates of 8 percent to 10 percent a year.
If you’re an investor, the experience of Denmark and other “no drama” growth stories provides some clues to the future of developing economies. The East Asian growth model, for all its wonders, belongs to history. Slow and steady may be the only option left. For whatever reasons, few countries have been able to scale up their educational successes as rapidly as the East Asian tigers. Trade growth, which exceeded overall output growth in the late 20th century, now seems stagnant. Many export industries are automated and hence don’t create as many middle-class jobs as they used to.
In other words, today’s world may resemble the 19th century more than the last few decades. That could mean fairly low measured growth rates, a premium on stability, few if any “break out of the box” alternatives and a time to invest in institutional quality. American democracy arguably was working better by the early 20th century than it was during the presidency of Andrew Jackson, and that helped America cope with later crises.
What’s also striking about the 19th century is that some countries, such as China and India, didn’t keep up. Indeed, their economies actually shrank for sustained periods of time. They had some bad luck, pursued bad policies and suffered under colonial and imperial oppression. Foreign rulers often were more interested in control than in producing public goods for the citizenry.
In the next generation, the emerging economies may return to these 19th century patterns. Either they will learn to build slowly and steadily, or quite possibly they will go into reverse.
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