Economic Growth in the Long Run

1
Economic Growth in the Long Run the Facts
2
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.
3
A Growth History of the World
4
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

5
Human Development Index
6
Growth in Modern Times
7
A Tale of Two Countries

• or, why is growth important

8
The outlook for country I

• An Australian expert observed that time was no
  object for this countrys easy-going workers.
  Their managers said it was impossible to change
  the habits of national heritage.
• Theyare a happy race, and being content with
  little, are not likely to achieve much.
• Foreign Affairs said this countrys economy was
  extremely weak.
• A journalist didnt see how she can by her own
  unaided efforts build up her resources even to a
  modest standard.

9
The outlook for country I

• Two 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.

10
Here is country Is growth
11
Country I is

• Japan

12
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.

13
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

14
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

15
The sad part is ...

• The Akosombo Dam project was the most successful
  project in Ghanas history.

16
The real tragedy is that Ghana stagnated for 50
years
17
So what?????
18
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.

19
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

20
As Robert Lucas puts it

• Once you start thinking about growth it is
  difficult to think about anything else

21
Incomes around the World
22
One possible solution

• CONVERGENCE

23
Convergence? (take 1)
24
Convergence? (take 2)

• Growth Rate of GDP per Capita 1960-1992, Versus
  GDP per Capita in 1960 (1992 dollars) 101
  countries

There is no clear relation between the growth
rate of output since 1960 and the level of output
per capita in 1960.
25
Convergence? (take 3)

• Growth Rate of GDP per Capita 1960-1992, Versus
  GDP per Capita in 1960 OECD, Africa, and Asia

Asian 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.
26
Convergence?(take 4)
27
Another possible solution

• FOREIGN AID

28
Aid Volumes (in)
29
Aid Volumes (out)
30
But does Aid Help?
31
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?

32
Robert Solow

• 1924-
• Neoclassical growth model (1956, 1970).
• Nobel prize - 1987