Chapter One
GROWING APART
Outline
Chapter 1
Introduces the subject and discusses why
growth matters
Tells stories about different growth
performance in different countries
around the world
Main point: Economic policies and
institutions matter for growth
Growing Apart
In other words:
A view of the landscape
Diverging growth paths
Communism vs. capitalism
Plan vs. market
Main message:
To grow or not to grow is in large
measure a matter of choice
Growing Apart
Great nations are never impoverished by private,
though they sometimes are by publick prodigality
and misconduct.
ADAM SMITH
There are many countries, not essentially different
either in the degree of security which they afford
to property, or in the moral and religious
instruction received by the people, which yet, with
nearly equal natural capabilities, make a very
different progress in wealth.
THOMAS MALTHUS
The beginning
Economic growth in the long run used to be
considered immune to all but technological progress
Which grew more rapidly: the United States or the
Soviet Union?
Economists did not fully acknowledge:
destructive force of communism
effects of gross economic mismanagement in many parts of
the world
They failed to build the experience of
communist and developing countries into
mainstream models of economic growth
Macroeconomic policy
Stabilization
Inflation
Redistribution
Inequality in the
distribution of
income and wealth
Reallocation
Inefficiency
The main objectives of
macroeconomic policy
Inflation, inequality, and
inefficiency were not
considered harmful to
growth
Adam Smith
Wealth of Nations
Sources of wealth
Division of labour
enhances efficiency
private enterprise
private property
good governance
free trade
International trade
 enlarges markets
 increases efficiency
 increases wealth and growth
Nations tolerably well advanced as to skill, dexterity, and
judgment, in the application of labour, have followed very
different plans in the general conduct or direction of it; and
those plans have not all been equally favourable to the
greatness of its produce.
ADAM SMITH
Determinants of long-term
economic growth
Economic systems
Economic policies
Economic institutions
Communism: on the
scrapheap of history
Explaining why
growth rates differ
Mixed market economy:
the only game in town
Questions
If the economic systems adopted by two countries
are not completely different, is it nonetheless
possible to trace the differences in their economic
performance to their different economic policies?
Or does technology dictate growth differentials in
such cases?
Or perhaps geography?
Or history?
Or all of the above?
Examination of economic growth in
theory and practice
Growth performance of four pairs or clusters of
countries since 1970
Low- and middle-income countries
But most of the points to emerge apply to
high-income countries as well
Those economies have developed quite
differently over the past 30-40 years despite
roughly comparable initial conditions
The four clusters
Thailand and Burma
Botswana, Nigeria, and Ghana
Uruguay, Argentina, and Spain
Madagascar and Mauritius
Burma and Thailand
Burma
1962: General Ne Win came
to power
‘victorious march towards
socialism’
self-reliance
but active client of IMF
1970s: respectable growth
rising investment
centrally planned  poor
quality
stagnant export
1980s: something had gone
seriously wrong
Thailand
rising export ratio
strong saving and
investment performance
banking system strongly
influenced by politicians
 quality of investment
questionable
strong education record
1960-1994: GNP per capita
increased by more than 5%
per year on average
compared with 1% in
Burma
Fig 1.1
Burma and Thailand:
GNP per capita, 1960-1994
(constant 1987 US$, 1960=100)
600
500
400
Burma
Thailand
300
200
100
0
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993
Fix Yellow signs
Burma and Thailand
Burma
spurts of rapid growth
depressed investments of low quality
plummeting exports
deteriorating education
evaporation of expertise
political control of economic affairs
In 1990, Burma’s military junta
refused to abide by the general
election victory of the opposition,
led by Aung San Suu Kyi
Thailand
the stock-market crash in 1997-8 not likely to
dim long-run prospects
Thailand’s growth prospects continue to look
bright
Thailand’s economy seems basically sound
In 1996, the universities
were shut down
Rapid growth over the long haul
does not always have to be smooth
Annual
average
growth of
GNP per
capita
19701995 (in
%)
Table 1.1
GNP per
capita
1995
(USD,
adjusted
for
purchasing
power)
Investment
as
percentage
of GNP
1995
Exports of
goods and
services as
percentage
of GNP
1995
Enrollment
in
secondary
education
as
percentage
of relevant
age group
1993
Annual
average
inflation
19701995
(in %)
Burma
1.2
…
12
2
…
13
Thailand
5.2
7,540
43
42
37
6
Botswana
7.3
5,580
25
49
52
11
Nige ria
-0.9
1,220
9
24
29
19
Ghana
-1.2
1,990
19
25
36
36
Uruguay
0.2
6,630
14
19
81
61
Argentina
-0.4
8,310
18
9
72
180
Spa in
2.0
14, 520
21
24
87
11
Mada gascar
-2.4
640
11
23
14
16
Mauritius
3.1
13, 210
25
58
59
10
Botswana, Nigeria,
and Ghana
Botswana
world record in growth
GDP per capita has grown by
7.5% per year since 1966
dependent on natural resources
- diamonds
80% of exports
40% of GDP
democratic
well-managed resources
strong education
stable economic development
11% average inflation rate
Nigeria
oil price increase in world
markets  income per capita
rose fourfold  poor
investment  unproductive
capital  collapse of output
low investment since 1980s
oil exports crowded out nonoil exports (90% of total)
natural resources: a mixed
blessing?
Botswana, Nigeria,
and Ghana
Nigeria
oil
80% of government revenue
20% of GDP
ruled by military on and off
19% inflation on average
Abundant natural resource
wealth can turn out to be, at
best, a mixed blessing
Ghana
model client of IMF and
World Bank since 1980s
increasing foreign trade
increasing investment
1982 - a turning point
exports of goods and
services rising
net foreign direct investment
flowing into Ghana 3.6% of
GDP in 1995 compared with
2.4% in Nigeria
36% inflation on average
3500
3000
2500
2000
1500
1000
500
0
Botswana
Ghana
Nigeria
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
Fig 1.2
Botswana, Ghana, and Nigeria: GNP
per capita, 1970-1995 (current US$,
Atlas method)
Uruguay, Argentina,
and Spain
Uruguay
abundant resources
dedication to social security and
social services
South American welfare state
active role of government
protectionism
declining GNP per capita
today: quite closed economy
rampant inflation
Economic growth
is relative
Argentina
gradual relative decline
political development lagged
behind economic progress
landowners ruled the
country
blocking decentralization,
democratization, and
diversification away from
agriculture
hardening conflict
between landowners and
emerging urban classes
gradual deterioration of
living standards
Uruguay, Argentina,
and Spain
Argentina
Perón president in 1946
high inflation
rapid escalation of debt
flawed economic policies
import substitution
overvaluation of the currency
insufficient competition
reduced foreign trade and dragged
down living standards
civil disorder, inflation, corruption,
and brain-drain  slow and uneven
growth
strikingly closed economy
history of high inflation
Spain
joined the European Union
in 1986
opened up its economy
expanded exports
History matters for
economic growth, as
does politics ...
... and so does inflation
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Argentina
Uruguay
Spain
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
Fig 1.3
and Spain:
Argentina, Uruguay, And
GNP per capita, 1970-1995
(current US$, Atlas method)
Madagascar and Mauritius
Mauritius
mixed market economy
since 1980: income per head
has increased fast
diversified economy
more open to foreign trade
and investment
invests more
farther along on its way from
agriculture to industry, trade,
and services
sends more girls go to school
Madagascar
centrally planned economy
since 1980: income per
head has fallen
growth differential between
the two countries has been
even larger since mid-1980s
more inflation
more dependent on exports
of raw materials
more indebted abroad
4000
3500
3000
2500
2000
1500
1000
500
0
Madagascar
Mauritius
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
Fig 1.4
Madagascar and Mauritius: GNP per
capita, 1970-1995
(current US$, Atlas method)
Conclusion
Country comparisons are not to be taken literally
intended to highlight some aspects of economic growth
What do the examples have in common?
All point to economic factors rather than exogenous
technology
economic system
institutions
orientation of economic policy
Key distinction:
Endogenous growth
vs. exogenous growth
This is the fundamental message of
the theory of endogenous growth
Aims of the book
Illuminate and simplify the subject and make it accessible to laymen and students
A. By interpreting the theory of economic growth, old and new, in
nontechnical language in order to identify the main sources of
growth
B. By emphasizing the economic policy implications of the theory
of growth and its empirical relevance
C. By demonstrating how, in theory and practice, economic growth
depends crucially on choices that people make, individually and
collectively
Since the second world war it has become quite
clear that rapid economic growth is available to
those countries with adequate natural resources
which make the effort to achieve it.
ARTHUR LEWIS
Questions for review
1. Does economic growth matter? To whom? Why?
2. Consider two countries, A and B, with the same national income per
capita in the year 2000. Suppose that in country A national income
grows at 4% a year on average and the population remains
unchanged, whereas in country B national income grows by 2% per
year and the population increases by 1% a year. If these growth
rates continue indefinitely, what will the ratio of income per head in
country B to that in country A be in 2025? What will it be in 2050?
3. In 1970, per capita GNP in the United Kingdom was about twice as
high as that of Hong Kong. From 1970 to 1995, the annual average
rate of growth of per capita GNP was 1.8% in the United Kingdom
compared with 5.8% in Hong Kong. In 1995, the number of mobile
phones per 1,000 people was 98 and 129 in the two countries. Do
you want to guess which of the two countries had more mobile
phones per capita?
Classroom discussion