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Saturday, February 13, 2010


China's economy has been growing at 10% annually. The UK at 2.5% if you don't count the last few years, about 1.5% if you do (Scotland about 1% below that but lets just put that down to bad management). The excuse normally given for this is of "convergence" - that poor countries naturally "play catch up" with rich ones. This is handy for the rulers of poorly performing rich countries but is it true.

Buried in the Wikipedia article on this theory is this mention of actual empirical evidence
A key prediction of neoclassical growth models is that the income levels of poor countries will tend to catch up with or converge towards the income levels of rich countries as long as they have similar characteristics – like for instance saving rates. Since the 1950s, the opposite empirical result has been observed on average. If the average growth rate of countries since, say, 1960 is plotted against initial GDP per capita (i.e. GDP per capita in 1960), one observes a positive relationship. In other words, the developed world appears to have grown at a faster rate than the developing world, the opposite of what is expected according to a prediction of convergence
This was apparently proven by Robert Barro some years ago though his article doesn't appear to be available. That rich countries inherently grow faster is inherently unfair & deeply unpopular. Most of the Google entries on the subject are intent on disproving it & are more sound & fury than scholarship e.g.
The observation by Barro that cross-country evidence is inconsistent with the hypothesis that poor countries tend to grow faster than rich countries is examined. The overall sample of countries employed in the Barro studies is adjusted by excluding those with small sample sizes (less than 15 observations) and/or those with not statistically significant trend growth rates. It is found that, in general, poor countries tend to grow faster than rich countries. However, this observation holds especially strongly for 17 countries with real per capita product above $1000.
Obviously if you eliminate the data that doesn't fit your theory then the ones left will. If you then cherry pick further for a particular 17 countries that will improve it even more. By definition the ones excluded, taken alone, would equally show the opposite trend.

Further the really long term evidence tends to show success improves success. The rate of growth throughout human history has been accelerating. The disparity between the richest & poorest several centuries ago has expanded form starvation being a common cause of death in poor countries & rare in rich to 250 fold (Singapore/Zimbabwe). Note, however, that Singapore is not a traditional wealthy country but one which has grown wealthy. This means being already wealthy is not the prime determinant of success or failure. That the fault lies not in our initial wealth but in our governments' competence.

The main likely reason that rich countries can grow a little faster is the same as why the growth rate has accelerated through history - that scientific & technology growth is even faster & the more technological your civilisation the easier it is to upgrade. Moore's Law, that computer capacity is doubling every 2 years or now even 18 months has been an extreme end of this though we are seeing similar rates now in bio & nano tech & possibly in space, though that is a particularly government controlled area.

Whatever the reasons the evidence is that if China & India can grow at 10%, despite being heavily bureaucratic & in China's case a dictatorship with still a considerable state sector, then we, as nominally economically free countries could be doing nearer 15%. The problem is that the "nominally" part of economically free is the important bit. Our government's regulations destroy 50% of our potential economy & government parasitism spends half of what is left so it is hardly surprising that an economy working on 25% isn't achieving world beating growth.

But we could be.

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