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Faster growth is not due to bigger booms, but to less shrinking
THROUGHOUT history, poverty is the normal condition of man, wrote Robert
Heinlein, a science-fiction writer. Until the 18th century, global GDP per
person was stuck between $725 and $1,100, around the same income level as the
World Bank s current poverty line of $1.90 a day. But global income levels per
person have since accelerated, from around $1,100 in 1800 to $3,600 in 1950,
and over $10,000 today.
Economists have long tried to explain this sudden surge in output. Most
theories have focused on the factors driving long-term economic growth such as
the quantity and productivity of labour and capital. But a new paper* takes a
different tack: faster growth is not due to bigger booms, but to less shrinking
in recessions. Stephen Broadberry of Oxford University and John Wallis of the
University of Maryland have taken data for 18 countries in Europe and the New
World, some from as far back as the 13th century. To their surprise, they found
that growth during years of economic expansion has fallen in the recent era
from 3.88% between 1820 and 1870 to 3.06% since 1950 even though average growth
across all years in those two periods increased from 1.4% to 2.55%.
Instead, shorter and shallower slumps led to rising long-term growth. Output
fell in a third of years between 1820 and 1870 but in only 12% of those since
1950. The rate of decline per recession year has fallen too, from 3% to 1.2%.
So why have these growth reversals decreased in length and depth? In another
paper** Messrs Broadberry and Wallis find that conventional explanations such
as demographic change or a sectoral shift from volatile agriculture to the more
stable services sector do not fully explain the shift.
More important is the rise of the rule of law, enabling disputes to be settled
by impartial courts. Before the modern era, elites would fight between
themselves for the spoils of growth and send the economy back to square one
through wars, corruption and the like. Respect for courts to resolve disputes
prevents this from happening. With populist politicians challenging the
authority of judges once again across the world, that is food for thought.
Perspectives on Economic Development by S. Broadberry and J. Wallis
This article appeared in the Finance and economics section of the print edition
under the headline "Shrink wrap"