Why do some rich economies grow faster than others?

Between 1973 and 2007 the twenty rich nations in the following chart averaged a 2% per year growth rate of per capita GDP. But some of them grew faster than others.

Why?

One reason is “catch-up”: partly because they could borrow technology from the leaders, countries that began with a lower per capita GDP tended to grow more rapidly. The growth rates shown here adjust for this.

What else matters? The list of hypothesized causes is lengthy. It includes investment, consumption, education, natural resources, macroeconomic policy, levels of taxation, welfare state size and structure, industrial policy, government regulations, the distribution of income, interest group organization, corporatist concertation, the partisan complexion of government, interest group-government coherence, cooperation-promoting institutions, and institutional coherence, among others.

In a chapter in the Oxford Handbook of Comparative Institutional Analysis, I take a stab at assessing the merits of some of these hypotheses. Many turn out to be of little use in understanding the cross-country variation in catchup-adjusted growth. Two that do seem to help are business and labor participation in policy making (“corporatism”) and limited product and labor market regulations, yet these go only a small part of the way toward accounting for the country differences.

An interesting element of the story is the tendency of countries that do well for a while to then lapse. During the course of these four decades an array of national models have gone in and out of fashion, first performing effectively and then falling on hard times: Germany (“modell Deutschland”) and Japan (“Japan Inc.”) in the 1970s and 1980s; the United States in the 1980s and 1990s; the Netherlands (“Dutch miracle”) in the 1990s; Denmark (“flexicurity”) and Ireland (“Celtic tiger”) in the 1990s and 2000s. Some later rebound, such as Sweden in the 2000s.

My conclusion: we know far less than we’d like to about this very important issue.

4 thoughts on “Why do some rich economies grow faster than others?

  1. Mmmm. I guess you know you need to include the HUGE falls in GDP in 2008-2010 and then the table might look a bit different. Ireland and the US will look as if they couldn’t really beat the average once you strip out the “growing too fast thru leverage” during the later period covered by your chart.

  2. Really interesting work. I wonder if it would make difference you attempted to control for working age population. For example, I’ve read that Japan’s growth per adult roughly in the prime working age, say 25-60, looks much better in the last twenty years than per capita due to their demographic issues. While Ireland has, I believe experienced something of a demographic dividend in the last twenty years.

    Of course, that raises the question of whether one should look at growth per working age adult as the better unit of measure or consider ‘stable demographics’ as a causal factor in growing an economy.

  3. I echo James in London. It is really notable that both the U.S. and Ireland, at the top of the charts, sunk like stones in the three years that followed.

    Portugal’s low marks could be attributed to the fact that it was the only country in the list to have experienced the blow to confidence in the political economy of a military coup in that time period, to having one of the most socialized industries in the OECD until 1989, and to the relatively delayed impact of the loss of its colonies relative to other countries on the list who did so sooner.

    After correcting for soon to be corrected bubbles in Ireland and U.S., and Portugal’s good reasons for dismal economic growth, the differences between these nation’s political systems and policies really didn’t matter much, with Norway and New Zealand as the high and low outliers respectively.

    Norway’s top spot can be plausibly attributed to rising oil prices for a small population, oil rich nation. There are other oil rich nations in the list (for example, the U.K.) but they have to share that oil wealth among far more people so it doesn’t impact growth rates very much.

    With the exception of New Zealand, any reasonable approximation of stable democratic capitalism seems to produce approximately the same results, and at the level of differences between the economies one has to ponder who accurate the “catch up adjustment” to the growth rates real is before deciding that the differences are even significant.

    I’ve known about New Zealand’s dismal economic growth relative to Australia for some time and lived there for a year, but I really can’t point to any real obvious reason why New Zealand was a slacker relative to every over developed nation in the world in this time period. It’s governmental system and economic policies aren’t drastically different from those of any of the other countries mentioned. It is small, but so are other countries on the list. It lacks oil, but so do other countries on the list. It is one of the most heavily dependent upon agriculture, but ag is still only 7% of GDP there and it could have transitioned to something else if it tried (indeed, it developed a major film industry in that time period).

    Forced to guess, my call on New Zealand would be to blame “brain drain” and insufficient economies of scale. Europe can have big multinational companies that attract top talent. Canada is larger than New Zealand and is also part of NAFTA. Japan is much bigger than New Zealand in population and a regional Asian center. Australia, the U.S., Canada and Europe with their bigger markets and greater opportunities lure away the best and brightest of New Zealand, and it is people and large enterprises, rather than policies or capital or resources that ultimately create most fundamental economic growth. New Zealand markets itself in the non-ag, non-tourism world mostly to Australia, so it has a small market that isn’t the hub of anything. When you export you most talented folks, your economy will stagnate.

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