Patterns of economic growth and development
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Contents
The Industrial Revolution
The Industrial Revolution, which began in the British Isles and Western Europe, dramatically changed the nature of economic production. It is important not just as a historical episode, but because the pattern of economic development that it established has become in many ways a model for development worldwide. Although, as we will discuss later, there are criticisms of the applicability of this model to current development issues, its strong influence on standard views of economic growth makes it an important starting point for understanding development.
Several elements were critical in creating the Industrial Revolution. First, new agricultural techniques, along with new kinds of tools and machines, made agriculture more productive. That meant that more agricultural output could be produced per worker and per acre of land. These productivity increases, continuing and eventually spreading across the globe, meant that human populations could grow dramatically – as, indeed they have done, reaching a first billion around 1810, and continuing to increase to the present global numbers of well over six billion. Because of the great increase in agricultural labor productivity, the number of workers needed to produce food for the rest of the population was shrinking even while the population as a whole was growing.
A second outstanding characteristic of the Industrial Revolution was the invention and application of technologies using inanimate sources of power (increasingly, fossil fuels) and machinery for production of goods. Mechanization created jobs in factories, largely replacing the previous patterns of producing goods at home. Railroads and other advances in transportation, as well as the new kinds of work organization, made it possible to assemble large numbers of workers in factories, resulting in huge urban agglomerations.
Another important factor in England’s increasing industrialization was its ability to rely on other countries, including its extensive network of colonies, for supplies of raw materials and as markets for its goods. England imported cotton fiber from India, for example. It discouraged the further development of cotton manufacturing within India by putting high import tariffs on Indian-made cloth, while requiring that India let in British-made cloth tariff-free.
An ever-increasing variety of things were produced in the emerging industrial sector. Some of these were items never seen before, such as bicycles, flushing toilets, machine-loomed cloth, communication by telegraph, early cameras, and steamships. Other products of industry were household goods, such as china dishes and cotton cloth, which had previously been used only by a small, rich elite. Others were, of course, the various kinds of machinery that were used to produce consumer items. These included the cotton gin, steam-powered textile machines, a steam-powered printing press that could turn out tens of thousands of copies of a page per day, and rotary mixers to make bread in commercial bakeries.
While the Industrial Revolution began in England, by the nineteenth and early twentieth century it was well along in much of Western Europe and other "early industrializing" countries such as the United States, Canada, and Australia. It is important not just as a historical episode, but because the pattern of economic development that it established has become, in many people's minds, the model for how development should proceed worldwide. The vocabulary of referring to rich countries as "developed" and poorer countries as "developing," for example, involves an implicit assumption that poorer countries are on a path of industrialization, on the road to perhaps eventually "catching up" to rich country lifestyles and levels of wealth.
Global Economic Growth in the 20th Century
During the twentieth century, real income in the Unites States rose about sevenfold, and world per capita economic output grew about fivefold. Most of this growth came in the second half of the twentieth century. Figure 1 shows the record of global growth since 1961. Gross world product more than quadrupled during this period (in inflation-adjusted terms). This was accompanied by more than a tripling in the use of energy, primarily fossil fuels. Even though world population doubled over the period 1961-2003, food production and living standards grew more rapidly than population, leading to a steady increase in per capita incomes.
This economic growth, though rapid, has been very unevenly distributed among countries (as well as among people within countries). Table 1 shows the per capita national incomes and rates of economic growth for selected countries and income categories during the period 1990-2005. The table gives national income in purchasing power parity (PPP) terms, comparing nations based on the relative buying power of incomes.
As you can see from Table 1, the record is very variable, with some countries achieving less than 1% annual per capita economic growth, and others achieving over 4%, with China in the lead at a sizzling 8.7%. Some already poor countries, such as Haiti and the Congo, are growing even poorer. While the data in Table 1 indicates that the low- and middle-income countries are growing slightly faster than high-income countries, this is largely a result of high growth rates in China and India, as we will discuss later in this article. What accounts for the striking differences in economic fortunes across countries? And can we expect these differences to increase or decrease?
Growth in Industrialized Countries
| Table 1: Income, Growth, and Population Comparisons, Selected Countries and Country Groups | |||
|---|---|---|---|
| Country or Category |
GDP per Capita, 2005 (PPP, 2000 US $) |
Percent Growth in GDP Per Capita (PPP, Annual Average, 1990-2005) |
Percent of World Population (2005) |
| High Income | 29,041 | 1.8 | 15.7 |
| -- United States | 37,437 | 1.8 | 4.6 |
| -- Hong Kong | 28,643 | 2.6 | 0.1 |
| -- Japan | 27,568 | 1.3 | 2.0 |
| -- France | 26,941 | 1.4 | 0.9 |
| -- South Korea | 19,560 | 5.0 | 0.8 |
| Middle Income | 6,535 | 3.1 | 47.7 |
| -- Argentina | 12,899 | 1.9 | 0.6 |
| -- Mexico | 9,132 | 1.3 | 1.6 |
| -- Russia | 9,747 | -0.2 | 2.2 |
| -- Brazil | 7,808 | 0.8 | 2.9 |
| -- China | 5,878 | 8.7 | 20.3 |
| Low Income | 2,253 | 3.1 | 36.6 |
| -- India | 3,118 | 4.1 | 17.0 |
| -- Bangladesh | 1,786 | 2.7 | 2.2 |
| -- Haiti | 1,642 | -2.4 | 0.1 |
| -- Nigeria | 1,058 | 1.7 | 2.0 |
| -- Ethiopia | 896 | 1.1 | 1.1 |
| -- Congo, Dem. Rep. | 679 | -5.4 | 0.9 |
|
Source: World Bank, World Development Indicators Database, 2006 | |||
Economies such as those of the United States, Europe, and Japan have benefited from many decades of economic growth. This growth has not been uniform; periods of expansion have alternated with periods of slowdown or recession. But overall, gross domestic product (GDP) in these countries has increased due to a combination of factors including growth in aggregate demand and labor productivity, technological innovation, and investment in manufactured capital. In addition, successful economic growth has often resulted from taking advantage of trade opportunities. Although industrialized countries have generally benefited from openness to trade, they have also typically also used protectionism to foster the development of important domestic industries.
These same factors have contributed to growth in all currently industrialized economies, but the patterns of growth have varied in many ways. Japan’s extremely rapid growth in the period 1950-1980 was often referred to as an “economic miracle”. More recently, the so-called "Asian Tigers" of South Korea, Singapore, Taiwan, and Hong Kong, have experienced similar “miracle” growth rates (at least until the Asian financial crisis of 1997).
A major cause of Japan’s extraordinary growth was its high savings rate, which peaked at more than 20% of household income in the mid-1970s. High savings were encouraged through low tax rates and a relatively modest Social Security system. The government played an active role in directing the national savings towards investments in particular industries targeted for expansion through subsidized loans.
Japan and the other “Asian Tigers” have demonstrated a pattern of virtuous cycles in which high savings and investment lead to greater productivity, a competitive export industry, and growth of domestic industries. The financial capital that results can be invested in machines, tools, factories, and other equipment that can further enhance productivity – and the cycle begins again. In addition, as the economy grows, more resources are available to invest in the development of health and educational systems. This sounds simple and obvious – yet many nations have had great trouble in achieving such virtuous cycles.
As is often the case when studying economic development, an approach that appears to drive growth in one case does not necessarily apply elsewhere. A counter-example to the importance of savings in the Asian experience is U.S. economic growth, which in recent decades cannot be attributed to high savings rates. Net national savings (gross savings by individuals, corporations, and governments, minus the consumption of fixed capital) has fallen from around 10% of GDP in the 1970s to only about 1% in 2004, one of the lowest rates in the industrial world.
However, a factor that appears to be essential in almost every case for promoting growth and development is human capital. While U.S. savings are low, American investment in human capital is relatively high. For example, only Sweden, Korea, and Finland have college enrollments beyond high school that are higher than that of the U.S. The Asian Tigers have also benefited from generally excellent educational systems, along with industrial structure that (especially in Japan) motivated workers with good employment benefits linked to company profitability.
Another critical factor in Japan’s growth was the way in which it encouraged the production of specific goods for export. Investment in technology-intensive industries, along with export-favorable policies, allowed Japan to quickly become a world leader in technology goods. While domestic aggregate demand in Japan was initially low, Japan was able to take advantage of growing world demand for its rapidly expanding output. But Japan also used tariffs and other barriers to promote their businesses, as well as channeling investment capital to government-favored industries.
Early theories of development assumed that the lessons from industrialized economies simply needed to be applied to nations at lower levels of income, so that they could follow a similar path of economic growth. But the global record of uneven development and inequality, as well as some recently recognized resource and environmental problems, makes the picture significantly more complex. In the rest of this article we will explore issues of global growth, inequality, and differing strategies for economic development.
Global Growth and Inequality
The global distribution of per capita gross domestic product (GDP) across countries is shown in Figure 2, where each country’s per capita GDP in 2004 has been translated into real 2000 U.S. dollars and adjusted for purchasing power for comparability. The United States, along with Canada, most of Europe, Australia, New Zealand, Japan, and a few other countries, enjoys a per capita GDP of more than $25,000. The poorest countries tend to be in Africa and Asia, where income per capita can be below—sometimes much below—$2,500.
Figure 3 gives us more information about how income is distributed across households (using per capita GDP as our indicator). In this figure, the world’s population is organized into successive income quintiles, each representing 20% of the world’s population. Thus the bottom quintile represents the poorest 20% of humanity, the next quintile represents the second-poorest 20%, and so on. The area associated with each quintile is in proportion to how much of the world’s income that they receive. As we can see in the figure, nearly three-quarters of the world’s income goes to the richest 20%. Meanwhile, the poorest 40% only receive 5% of the world’s income.
Traditionally, many economists have taken an optimistic view concerning the future of global income inequality. A pattern of faster growth in poorer countries is predicted by the traditional Solow growth model. According to elaborations of that theory, a given increase in the manufactured capital stock should lead to a greater increase in output in a country that is capital-poor than in a country that is already capital-rich. Therefore, some economists have reasoned, it is just a matter of time until “less developed” countries catch up with the countries that have already “developed”. The idea that poorer countries or regions are on a path to “catch up” is often referred to as convergence. Describing low-income countries as “developing” assumes that they are on a one-way path towards greater industrialization, labor productivity, and integration into the global economy.
Is it true that “developing” countries are, in general, catching up with the “developed” countries? A number of studies of GDP per capita growth rates have concluded that lower-income countries are catching up to higher-income countries (as shown by the data for country groups in Table 1). However, this has largely been due to the strong growth rates experienced by the very populous countries of China (categorized as a middle-income nation) and India (a low-income nation). Because these two countries have such large populations, they have a disproportionate influence on the average growth rates for low- and middle-income nations shown in Table 1. If, on the other hand, we count each country equally, the results suggest that convergence is not occurring in the majority of developing countries. In fact, if we count each country equally the average annual growth rate of real GDP per capita (PPP) over 1990-2005 was 0.8% in the low-income nations, 2.0% in the middle-income nations, and 2.1% in the high-income nations – suggesting further divergence rather than convergence.
We can see what has happened to some “developing” country incomes relative to high-income countries better in Figure 4. Here, GDP per capita is expressed as a proportion of average GDP per capita in the high-income countries. While India’s per capita income rose in absolute dollar terms, India made only slow gains in comparison to the high-income countries (though its growth has accelerated recently). Other countries fared worse. Nigeria, along with many other countries in Sub-Saharan Africa, actually lost ground. Income per capita went from about 6% of the rich country level to an even lower level – around 4% of the rich country average in 2005. In China, on the other hand, the movement has clearly been towards “convergence,” with PPP-adjusted per capita income rising from 4% to 20% of the rich country average during this period.
Current Patterns of Growth
How fast are countries growing now? Figure 5 summarizes a wealth of information about the twenty-year period leading up to the turn of the century. The horizontal axis measures gross domestic product (GDP) per capita in 1980, so that the United States and other industrialized countries are represented by spheres off to the right, and poorer countries are represented by spheres off to the left.
The vertical axis measures average annual per-capita growth rates from 1980 to 2000. Thus faster-growing countries, including China and India, are high on the graph, while slower-growing countries are represented by dots closer to the horizontal axis. Some countries have experienced negative growth—that is, their levels of income per person have actually fallen in recent years. High income countries have generally experienced moderate, positive average growth rates (on the order of 1% to 2%), while growth rates diverge much more as one moves down the income scale. At very low incomes, average growth rates diverge dramatically (ranging from about -2.5% to 6%).
The size of the spheres are proportional to the population of the country represented, so that the United States shows up as a medium-sized sphere, while China and India—together, home to nearly 40% of the world's population—are represented by very large spheres. China and India represent the "good news" side of the development story. While many people in these countries remain desperately poor, at least the trend is going in the right direction. Because of strong growth in these two very populous countries, a large number of people have been lifted out of poverty in recent decades.
The countries of Sub-Saharan Africa, which have been particularly hard-hit by AIDS and war, are represented by solid dots in Figure 5. They account for a large proportion of the very low and negative growth rates. This is the very "bad news" side of the contemporary development story. Far from "developing," such countries have actually become poorer in recent decades.
Further Reading
- Global Development And Environment Institute, Tufts University
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