Economic patterns since 1950

[Beet]

Here I informally examine some broad economic trends regarding comparative national economies since World War II. Thank Angus Maddison, the world's most prominent expert in macroeconomic accounts, for the source data. There are a number of highly illuminating reports available at his website. Maddison has compiled a per capita GDP data for 55 countries, including all major economies except the former Soviet Union, going back to 1950. I used excel to create a systematic comparison of long-term performance by country, which I did not see either at his site or elsewhere online, using his data. The question is, what has been the form of comparative economic growth since 1950?

Convergence between Anglo societies and continental Europe (and Japan)

The economic theory of convergence stipulates that poor countries will grow faster than wealthy ones because they have higher returns on capital investment. Since capital generally has diminishing returns, countries with low stock will have higher investment returns. Maddison's data supports the notion of convergence between the Anglo societies and continental Europe (and Japan) (or alternately, convergence within the "advanced" world, however, Argentina and Venezuela did not exhibit conditional convergence while the Communist East did. Maddison unfortunately didn't have data on the USSR) since 1950.

Specifically, New Zealand, Switzerland, Australia, the United States, the United Kingdom, Sweden, Canada, and Denmark have all grown more slowly than the weighted average of his sample (2.5% annual growth GDP) since 1950. These countries had per capita GDP in 1950 ranging from a low of $6,684 (Denmark) to a high of $9,573 (United States). Their postwar growth rates have ranged from 2.48% (Denmark) to 1.56% (New Zealand). All except Switzerland, Sweden, and Denmark are Anglo societies.

On the other hand, Spain, Ireland, Austria, Austria, Greece, Portugal, Norway, Finland, the Netherlands, Germany, Japan, Romania, Hungary, Belgium, France, Bulgaria, and Poland all have grown more quickly than the weighted average. Note that there are no Anglo-Saxon countries in this grouping; by 1950 continental Europe had generally recovered to their prewar levels of output or even beyond. These countries had per capita GDP in 1950 ranging from a low of $1,182 (Romania) to a high of $5,850 (The Netherlands). Their postwar growth rates have ranged from 2.52% (Poland) to 4.4% (Japan). Japan though not in Western Europe behaved very much like a Western European country in this regard, with the exception that it was poorer in 1950 and grew much more quickly.

The fact that not a single developed country below the weighted growth average of the sample had a 1950 per capita GDP above any of the European countries above the weighted growth average of the sample suggests strong evidence for convergence within the "advanced" world, as defined by Europe and its offshoots, excluding Latin America. In the postwar environment, Western Europe caught up with its Anglo neighbors and Eastern Europe made strides in doing so; despite their communist occupation they turned in solid performances.

Divergence between the advanced countries and others

With the exceptions of Switzerland, New Zeland, Argentina, Venezuela and Chile, most of the poor countries in Maddison's sample underperformed not only continental Europe but also all of the advanced countries in the period 1950-2004. Burma, Indonesia, the Philippines, Bangladesh, Pakistan, Colombia, Ethiopia, Morocco, Peru, Ghana, Nigeria, Cote d'Ivoire, Tanzania, Dem. Rep. Congo, and Kenya all lagged even farther behind the West in 2004 than they did in 1950. In fact, most of the African countries had annual growth rates less than 1%, more than one standard deviation below the mean, and some more than two standard deviations. In these cases, the gap between the rich and poor in a global context has been growing over the long term as many countries fail to keep pace with the advanced nations' growth rates. India, on average, grew slightly faster than the U.S. but slower than continental Europe.

Poor performance in Latin America

In 1950 Latin America contained some of the world's most advanced powerhouses. Argentina was wealthier than Germany, while Chile was wealthier than Italy (remembering that by 1950 both Germany and Italy had recovered above their prewar levels). Also, Venezeula's per capita income of $7,400 was higher than that of the United Kingdom. Since 1950, however, they each have been among the world's worst performing economies. Not a single Latin American economy had above average performance in the latter half of the 20th century. Venezuela, the single worst performer, saw a 23% decline in per capita income between 1950 and 2004. These nations shown well before the fall of the Soviet Union that it is possible to fall out of developed status into practically third world status.

A Few Exceptions (Mostly in East Asia)
The best performances in the sample by far were the Republic of China (Taiwan) and South Korea, both of which grew at rates greater than two standard deviations above the mean (Japan and Greece each grew at one standard deviation above the mean). Thailand and mainland China were also exceptional performers, growing more quickly than all continental European countries save Greece and Spain. Of course the low bases which they started mean they still lag woefully behind. However, ROC/Taiwan and South Korea also started with very low bases and have by now managed to achieve developed status.

Egypt, Turkey, and South Africa also had reasonable performances, comparable to those in Europe.

Analysis

What accounts for the sources of economic growth in the postwar era? Since the industrial revolution began in Britain in the 18th century, it has been the standard of an advanced industrial economy. From that time up through World War II, the Anglo-Saxon world, with the aid of abundant natural resources, had the highest standard of living in the world. After World War II, continental Europe, especially Western Europe, plus Japan, caught up and reached parity with the English-speaking world.

The performance of the developing world has been bleak, especially outside east Asia. Most African, south and southeast Asian countries have grown more slowly than the advanced countries even as they started with a lower base. This has led to growing inequality on multiple levels; both in absolute terms and in proportional terms. This strongly contradicts the convergence theory, at least in its unconditional application. Latin America has also been among the worst performers, with arguably three countries falling from advanced to developing status, something relatively unprecedented, especially in the absence of post-communist transition.

In most of the world there seems to be a cultural determinant of long term economic performance. That is, countries that are culturally similiar to other countries which are already developed, tend to catch up over time to its culturally similiar "leader" country. The greater the cultural difference, the longer this takes. When the industrial revolution first occured in Britain, it first spread to other English-speaking societies, either through direct imperial or linguistic connection: in the first half of the 20th century, the U.K., the U.S., Oceania and Canada had the highest living standards. In the second half of the century, the non-English speaking but still "Western" world (continental Europe in this case) in turn caught up with the English-speaking world. The European Economic Community and the European Union helped bind these countries together.

At the same time the rest of the Spanish and Portugese speaking world apparently collapsed, with Latin America turning in some of the worst performances. These empires dated from the first wave of imperialism in the 16th century and their home countries (Spain, Portugal) had lost their vitality long before the industrial revolution broke out. There was no organization similiar to the Commonwealth for either of these cultural realms. Max Weber then might find some vindication in Latin America's poor performance.

In east Asia, the most successful economy was Japan, and the most successful followers of Japan were its former colonies, ROC/Taiwan (which it ruled 1895-1945), and South Korea (which it ruled 1910-45). Later their influence spread in turn to mainland China and Thailand. The Catholic Philippines and the muslim Indonesia however, fared no better than other developing nations.

The Cold War played a role; almost all of the success stories received large amounts of U.S. aid to stave off communist agitation; communist ideology dampened growth in Eastern Europe.

Conclusions

1. The cultural connection points to the importance of social capital: a poor country's greatest advantage seems in having some cultural, social connection with a more developed nation.
2. Once cultural differences can be overcome, then economic theory sets in, and conditional convergence based on differing returns to capital can lead to equalization.
3. Virtually all successfully developing countries received substantial amounts of aid at their critical stages, usually in connection with the Cold War.
3. The poor performance of Latin American economies is a mystery.
4. The world has become increasingly unequal in the six decades since the end of World War II, with the haves increasing their advantage over the have-nots in both absolute and relative terms. This gap shows no signs of decreasing.

[opebo]

3. The poor performance of Latin American economies is a mystery.
4. The world has become increasingly unequal in the six decades since the end of World War II, with the haves increasing their advantage over the have-nots in both absolute and relative terms. This gap shows no signs of decreasing.

Interestingly most of those countries cited as having higher growth rates since 1950 had a redistributionist political consensus, if not egalitarian at least one that put limits on the levels of inequality that would be tolerated.  Continental Europe is famous for this.

By contrast Latin America has always been higly unqual and has become much more so since 1950.  It is too bad that the United States has been following the Latin American model rather than the Continental model for some time now.

[DanielX]

My personal conclusions:
1. Nations that have politically unstable countries generally aren't good places for economic growth. Instability has been rampant in Latin America and Africa in the past 50 years, less so in Asia, and minimal in most of Europe or North America.
2. Formerly unstable areas that have gained a measure of political and economic stability perform very well indeed. In 1950, Europe and East Asia were both suffering the aftereffects of an extremely destructive war. However, with newfound stability and investment, they prospered.
3. Generally nations that have policies that are friendly to industry are good for growth, at least for nations that started out very poor. Much of Southeast Asia has embraced 'sweatshop labor' in the past few decades; much of it is poor but the economies grow rapidly unlike the hellholes of Africa.
4. Redistributionist economics only work when there's capital to redistribute (ie not well in third world countries - see Argentina for an example of a place where redistributionism failed; Venezuela is another case), and when such policies are implemented gradually, consistently, and in a manner that does not overly impede upon individual liberties. Too much, or too inefficient, can lead to short bursts of growth followed by long malaises (think France or Japan or 1960s-70s USA).
5. Free Democracies that last for 10 years or more almost always outperform autocratic regimes, unless the autocracies are unusually permissive in economic activities (such as post-1970s China, Pinochet's Chile, or Singapore).
6. Nations that 'wall themselves off' with high tariffs and restrictions do not do very well economically (especially combined with #5).
7. Unless their leaders have massive economic savvy or there's a simply gargantuan amount of unrealized growth potential, regimes that engage in near-total economic control generally speaking do not do very well (combine with 5 and 6, and you've got the situation in North Korea).
8. Tourism can be a big help - for any economy (see several European countries or the Caribbean). France's economic growth is, I think, largely a result of it being the world's #1 tourist country.
9. During the main Imperialist period, despite mistreatments and malinvestments, the Empires generally speaking had a stake in making their territories at least minimally competant in economics - and they often invested in a territories' infrastructure, for instance, for their own benefit but had the side effect of improving the nation's infrastructure. They also provided political stability. Their mistreatment of the populace and lack of investment in heavy industry might have actually been a spur for economic growth in the newly independent nations, except for a few things: 1. The Empires didn't really have an interest in actually preparing their colonies, especially in Africa, for independence. Generally they held on until the price became too high, then just cast them off without preparation. 2. The new leaders of the countries were autocratic, often at odds with each other, and implemented a modified redistributionist system in which the former empire's assets in the territory were redistributed into their own pockets. 3. The Empires (mainly European, as the US played little part in Africa) continued to intervene, not to promote democracy but to prop up favored governments and ensure a consistent supply of raw materials while dissuading heavy industry. 4. Old ethnic conflicts, dulled by the Europeans, re-awakened when they left - like the Hutu/Tutsi conflict. Thanks to these, the conditions in Africa, especially, declined.

[dazzleman]

Very interesting comments, thefactor and DanielX.

I think that a lot of the growth in the gap between poor and wealthy nations has to do with wealthy nations becoming a lot wealthier, and poor nations going nowhere or, in some cases, descending into political turmoil, which leads also to economic calamity.

DanielX makes a great point that the severance of the former colonies from their wealthy European "motherlands" removed one pillar in the economies of these countries.  That is a big factor in my opinion.

I also think that political stability is a huge factor.  Economies don't develop well in the face of political instability.  The deleterious effect of the Soviet Union also played a big role in the developing world, as many countries at least partially bought into an economic system that can only produce poverty and failure.

Some of it is human psychology.  In many parts of the developing world, the new rulers after independence were much better at tearing things down than they were at building anything constructive.  They maintained power by rejecting and excoriating the wealthy "imperialist" powers and embracing stupid economic theories popularized by the Soviets.  People in those countries supported this because it sounded good to them, but it also guaranteed their continued economic misery.  This is a widespread problem, even domestically -- those who are poor supporting policies more intended to hurt the "rich" than to help them, and in the end, they are hurt much more than the "rich."

[opebo]

So, dazzle, how do you explain the fact that most of the fastest growing countries since 1950 pursued liberal redistributionist policies?

[dazzleman]

So, dazzle, how do you explain the fact that most of the fastest growing countries since 1950 pursued liberal redistributionist policies?

How do you explain the fact that the biggest economic disasters since 1950 pursued redistributionist policies?

[Filuwaúrdjan]

How do you explain the fact that "redistributionist policies" can mean all kinds of things often very, very different to each other?

[dazzleman]

How do you explain the fact that "redistributionist policies" can mean all kinds of things often very, very different to each other?

Yes, it depends on what type of "redistributionist" policies are being pursued.  Some are good, and some are highly destructive.

[Beet]

I thought this would be a good time to bump this up, in light of all the "decline and fall of Europe" melodrama.

AuH20 actually mentioned Europe had been in decline since 1920, which reminded me of this thread. While there may be a lot more purdy shapes and fragmented colors on "the map" today, Europe's economic advantage over Latin America, Africa, and much of Asia has actually increased tremendously since 1920, and it has also icnreased relative to the US and UK. I just thought that might be relevant.