L. Pritchett and E. Werker from the Harvard Kennedy School have released a working paper titled "Developing the guts of a GUT (Grand Unified Theory): elite commitment and inclusive growth". The paper deals with why some countries are able to generate periods of high economic growth and why some countries are able to sustain economic growth over long periods of time. Ultimately, the writers hope to provide a theory that explains both the good and bad economic performers.
Interesting points from the paper include:
- "Nearly all of the currently rich countries are rich because they grew at a modest pace for more than a hundred years. The GDP per capita in OECD countries typically grew at around 2 percent per annum from 1870 to today.This is roughly the average pace of growth of all countries since 1960." Steady positive growth produces better results than boom-bust sequences of growth.
- "Countries with boom and bust have episodes of both rapid growth but also of collapse." Such unsteady growth characterizes many of the poorest countries. "One key fact that differentiates the growth performance of the “developed” countries from the “developing” countries is that developing countries are more likely to have negative shocks to growth and suffer serious reversals in those negative shocks... when developing countries are growing they grow considerably faster than developed countries—about 1.5 ppa faster (5.37 versus 3.88). But during periods of negative growth the growth is much slower—2.3 ppa slower (-4.61 versus -2.33)—and the slowness when slower is slower than fastness when fast".
- "Countries may have the same average growth rate but very different dynamics." The UK and Ghana illustrate this point in Exhibit 1 below.
- There is by now a large body of empirical literature suggesting that “institutions” are important to long-run economic prosperity. Institutions are both public and private sector organizations. "There is often a very strong connection between levels of prosperity and levels of the quality of “institutions” but the connection between the initial level of the quality of institutions and subsequent growth or between economic growth and changes in institutions is often very weak. What “weak institutions” mainly predict is a high variance of growth rates.
- "The main difference in the data in the growth rates of those countries which currently have electoral democracy and “autocracies” is that “autocracies” have a higher variance of growth rates. The highest and lowest economic growth rates tend to be in the “autocratic” category".
- There is a tight link between per capita GDP and quality of government, which is defined as a) rule of law, b) quality of bureaucracy and c) control of corruption.
- For countries to create steady growth states both the political and economic institutions must be inclusive. When either type of institution is not inclusive growth is unsteady. This conclusion supports my belief that education and social inclusion are the basis of individual empowerment, which leads to the individual taking control of their economic and social well being.
The interesting case is, of course, Taiwan, Korea and Singapore, who have each gone from near poverty to sustainable growth in per capita GDP for a 50+ year period. All three are characterized by economic inclusiveness and perhaps Singapore establishes the minimum condition for political inclusiveness. Establishing the minimum level of political inclusiveness, given that economic inclusiveness appears to have been established, is perhaps the real challenge in China if they wish to establish long term, steady economic growth.
Exhibit 1