Stable growth
Evidence from after 1950
The study guide discussed that real GDP per capita is the piece of data we are going to be most concerned with when studying growth. So the first thing is to look at how the log of real GDP per capita changed over time. We’re going to do this for a set of relatively developed countries: US, UK, Canada, Australia, and Mexico. The most important thing in the figure you see below is how boring it is. The growth rate was stable for each country. How do you know it was stable? Because the slope of each line was pretty similar for decades. If you’re not sure how the growth rate is related to the slope of these lines, review this section.
Moreover, that growth rate was very similar for all five. If you stare at the figure long enough, you can make the case that Mexico’s growth rate became permanently lower around 1980 (or that Mexico’s growth rate was somewhat higher than normal from 1965 to 1980).
While the growth rates of these five countries are stable and similar, note that the level of GDP per capita was not similar. Mexico is demonstrably poorer than the others. The difference in log GDP per capita between Mexico and the US is about 1, which means that the ratio of GDP per capita between the US and Mexico is about 2.7 to 1, and has been for about sixty years. If you’re not sure how the difference in logs of 1 leads to a ratio of 2.7 to 1, see here.
Mexico’s living standards grew, but only enough to keep pace with the US. The other three countries in the figure are much closer to the US living standard, but again those gaps remained relatively stable over time.
Not every country is as boring as these five. The next figure below plots (log) GDP per capita for the US (as a reference) and five new countries (Germany, Japan, South Korea, Nigeria, and China). For each of these five the locus of log GDP per capita was not linear, or often even close to linear. The slope of these lines changed over time, implying that the growth rate of GDP per capita changed as well. In almost every case, however, the lines look concave, meaning that the growth rate was falling over time.
Moreover, you can see that as GDP per capita in each country approaches the level of that in the US, the growth rate falls to match (roughly) the US growth rate. Germany, Japan, and now South Korea all seem to be asymptoting towards the level of living standards in the US. They started out much lower in 1950 and 1960, as you can see. In 1950 the gap in living standards between the US and Germany was about 2.7 to 1, between the US and Japan about 4.5 to 1, and between the US and South Korea about 25 to 1. But their high growth rates (as evidenced by the high slopes) allowed them to catch up to the US, at which point their growth rates slowed (lower slopes), and they are all now have living standards slightly lower than the US. But note that their growth rates (slopes) all are becoming very similar to that in the US, UK, Australia, Canada, and Mexico.
The experience of China is not as conclusive. In 1950 the gap in living standards with the US was about 43 to 1. Around 1980, the growth rate in China picked up, and since then it has been growing much faster than the other countries in the Figure. By 2015, this left the gap between the US and China at about 4.5 to 1. Based on the evidence of Japan, South Korea, and Germany, we might expect that in the future China will approach the living standard of the US, but that its growth rate will slow down so that it matches the US. But we don’t know this will happen for sure.
Nigeria also looks like an outlier here. In 1950 it had higher living standards than China and South Korea, but from that point forward the growth rate was close to zero, as shown by the line being close to flat. Only since 2000 does there appear to be some regular growth in GDP per capita. In this case we don’t have anywhere close to enough evidence to decide whether Nigeria is entering a period in which it will catch up to the other countries, or whether it will continue to lag behind.
Let’s take the evidence in these figures and use them to establish a few stylized facts. Be concious of the fact that these facts are going to be appropriate for relatively developed economies, and don’t hold for all countries (e.g. they aren’t applicable to Nigeria, and we’re not sure if they hold for China yet).
The growth rate of GDP per capita in developed economies appears to be stable over the long-run (e.g. decades)
And we can follow that fact up with something even more precise.
The growth rate of GDP per capita in developed economies appears to be the same in the long run, at about 1.8%.
This number of 1.8% comes from looking at the actual slope of the lines in the figures. For a place like the US, the growth rate of GDP per capita has been about 1.8% for decades, while in a place like South Korea it has slowed to this rate after catching up in living standards to the US.
Alright, last fact for this section, and it relates to the level of GDP per capita.
Even in the long run, there are permanent differences in the level of GDP per capita across countries.
You can see this by looking at the case of Mexico and the US, or the UK and US. Even though they grow at roughly similar rates, those two countries have lower levels of GDP per capita than the US at all points in time. That level difference is permanent in the sense that if all these countries continue to grow at roughly 1.8% per year, Mexico and the UK will never have GDP per capita catch up to the US level.
Longer run evidence
The data in the figures above just goes back to 1950. For a smaller set of countries we can stretch the evidence back even further. To do this we’ll use data from the Maddison Project which was an attempt to create comparative measures of living standards farther back into the past. By necessity, this data isn’t quite as accurate as what we used above.
The next figure plots log GDP per capita for four developed economies: US, UK, France, and the Netherlands. The data go back to 1820, so we’ve got almost 200 years of evidence.
A remarkable thing (to me) about this figure is how boring it is. The lines are very…linear. This implies that for long periods of time the growth rate of GDP per capita was stable in these countries. There are certainly fluctuations, but for decade after decade these countries saw growth rates of around 1.7-2% per year.
There are some deviations, of course. Around the 1930s and 1940s you can see the Great Depression and World War II first devastate GDP per capita and then boost it up. But note that after World War II the path of GDP per capita seems to return very closely to the original paths. This is one of the reasons we tend to rely on those stylized facts shown above. They appear to hold for very long periods of time.