One of the less heralded truths of economics is that growth miracles, while they make for good press, are overrated. It’s an insight that could help us better understand the outlook for developing countries such as China.
Most of the world’s wealthiest and best-governed countries got there without super-rapid bursts of growth. Denmark, which has a per capita income of about $52,000 and is frequently ranked as one of the happiest countries in the world, never experienced what anyone would call an economic miracle.
Or consider the U.S., where per capita income surpassed Latin America in the 19th century – thanks mainly to the latter’s stagnation. U.S. growth rates at the time were typically below 2 percent, and even lower up through 1860, hardly impressive by the standards of today’s China or India – or for that matter today’s U.S. The big advantage of the U.S. is that it avoided major catastrophe for long periods of time, apart from the Civil War, and pushed ahead with fairly steady progress.
Borrowing of technological know-how, along with exports and rapid investments in education and infrastructure, is what later allowed the Asian tigers of Japan, South Korea, Taiwan, Hong Kong, Singapore and China to achieve growth rates of 8-10 percent a year.
If you’re an investor, the experience of Denmark and other “no drama” growth stories provide some clues to the future of developing economies. The East Asian growth model, for all its wonders, belongs to history. Slow and steady may be the only option left.
Few countries have been able to scale up their educational successes as rapidly as the East Asian tigers. Trade growth, which exceeded overall output growth in the late 20th century, now seems stagnant. Many export industries are automated and hence don’t create as many middle-class jobs as they used to.
In other words, today’s world may resemble the 19th century more than the last few decades. That could mean fairly low, measured growth rates, a premium on stability, few if any “break out of the box” alternatives and a time to invest in institutional quality.
What’s also striking about the 19th century is that some countries, such as China and India, didn’t keep up. Indeed, their economies actually shrank for sustained periods of time.
In the next generation, emerging economies may return to these 19th-century patterns. Either they will learn to build slowly and steadily, or quite possibly they will go into reverse. •
Tyler Cowen is a Bloomberg View columnist.
