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Sunday, July 24, 2011

Growth Rates Have Been Reduced, Are Being Reduced And Should Be Increased

  This graph, comparing the rate of economic growth of developed and developing countries over the last 60 years comes from Dani Roderick via Tim Worstall. Tim takes it as proof that the Washington Consensus forced the 3rd world to adopt sensible policies and thus achieve growth. I suspect the example of China may also have made them more susceptible to such policies but it seems a fair first approximation.
   The Consensus is that most organisations influencing development push for
1 - Fiscal policy discipline;

2 - Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;

3 - Tax reform – broadening the tax base and adopting moderate marginal tax rates;

4 - Interest rates that are market determined and positive (but moderate) in real terms;

5 - Competitive exchange rates;

6 - Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;

7 - Liberalization of inward foreign direct investment;

8 - Privatization of state enterprises;

9 - Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;

10 - Legal security for property rights.
  All stuff that any classic liberal, such as myself supports and hardly surprising that it works. Also mostly not areas where the developed countries are trying to follow their own principles. In Britain we don't have 1, 2,3,4,or 9 and I could argue that our anti-nuclear policy offends against 10 and through more regulation achieves effective nationalisation (8). We developed countries could try taking our own advice.

  However, being part of the developed world I am more interested in the thin line on the graph - showing the developed growth rate and the effects of its decline since 1960.

  From the peak of about 1959 our annual growth rates have fallen from an average of 3.8% to 1.8% that means, that by not maintaining that level, we have lost an average of 1% growth for 52 years. Which means national and personal wealth could have averaged 167% of what it could have been with no fall..

  However up to then we had a growing trend. Since all economic growth depends, in the end, on scientific and technological progress and the trend of technological progress, for example Moore's Law, was rising then and is currently rising faster it would certainly be reasonable to assume that the trend up to 1959 should have been continued, or even increased. Extrapolating on the trend we should have seen growth rising to about 6.1% - an increase of 4.3% annually over current reality. Averaging between the initial unchanged figure and 4.3% we should, following trend, now all average 3 times better off. This fits pretty well with a previous calculation I made  showing we would be 2.4 times better off if we had allowed nuclear to develop.

  Of course if we assume that growth rates would have risen exponentially, as they have throughout history, we would have done much better but lets be conservative in our assumptions.

   1962 saw the publication of Silent Spring; 1958; saw the no lower threshold radiation damage theory introduced by bureaucratic fiat, without any scientific evidence and by the early 1960s it had become accepted "science", still without evidence; This is the period of the Test Ban treaty agitation resulting in the ban in 1963; the mid 60s saw the North America Water and Power Alliance prevented from watering the west because of "environmental" concerns; it is also when nuclear space ships which could have got to "Mars by 1965, Saturn by 1970". While the Luddite movement and not coincidentally the movement for ever more government power, regulation and a bigger share of the economy only became large enough to dominate in the 1970s it had been growing and holding back progress since 1959 as tie graph shows as this timeline shows.

    The good news from this is that we could get back to this 6.1% annual growth with no trouble - simply by stopping the Luddite and government parasitism. Indeed since basic science has been progressing for the last 52 years there must be an awful lot of pent up growth available any time free enterprise is unleashed. In the period of catch up doubling that, would probably be achievable even without government taking a pro-active position of supporting economic growth.

  The alliance between the Luddites and the bureaucrats to provide cushy jobs for the latter and the end of economic expansion for the former is admitted even by them in their more honest moments. I consider that dragging us back to the Middle Ages through false scare stories an like Thomas Jefferson "I have sworn eternal enmity before the altar of Almighty God, against all forms of tyranny over the mind of man".

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