Chapter 1 – The Facts of Economic Growth

Keywords

• Economic growth;
• Development;
• Long-run growth;
• Productivity

JEL Classification Codes

• E01;
• O10;
• 04

“[T]he errors which arise from the absence of facts are far more numerous and more durable than those which result from unsound reasoning respecting true data.”

—Charles Babbage, quoted in (Rosenberg, 1994, p. 27).

“[I]t is quite wrong to try founding a theory on observable magnitudes alone… It is the theory which decides what we can observe.”

—Albert Einstein, quoted in (Heisenberg, 1971, p. 63).

Why are people in the United States, Germany, and Japan so much richer today than 100 or 1000 years ago? Why are people in France and the Netherlands today so much richer than people in Haiti and Kenya? Questions like these are at the heart of the study of economic growth.

Economics seeks to answer these questions by building quantitative models—models that can be compared with empirical data. That is, we’d like our models to tell us not only that one country will be richer than another, but by how much. Or to explain not only that we should be richer today than a century ago, but that the growth rate should be 2% per year rather than 10%. Growth economics has only partially achieved these goals, but a critical input into our analysis is knowing where the goalposts lie—that is, knowing the facts of economic growth.

The purpose of this paper is to lay out as many of these facts as possible. Kaldor (1961) was content with documenting a few key stylized facts that basic growth theory should hope to explain. Jones and Romer (2010) updated his list to reflect what we’ve learned over the last 50 years. The approach here is different. Rather than highlighting a handful of stylized facts, we draw on the last 30 years of the renaissance of growth economics to lay out what is known empirically about the subject. These facts are updated with the latest data and gathered together in a single place—potentially useful to newcomers to the field as well as to experts. The result, I hope, is a fascinating tour of the growth literature from the perspective of the basic data.

The paper is divided broadly into two parts. First, I present the facts related to the growth of the “frontier” over time: what are the growth patterns exhibited by the richest countries in the world? Second, I focus on the spread of economic growth throughout the world. To what extent are countries behind the frontier catching up, falling behind, or staying in place? And what characteristics do countries in these various groups share?

1. Growth at the Frontier

We begin by discussing economic growth at the “frontier.” By this I mean growth among the richest set of countries in any given time period. For much of the last century, the United States has served as a stand in for the frontier, and we will follow this tradition.

1.1. Modern Economic Growth

Fig. 1 shows one of the key stylized facts of frontier growth: For nearly 150 years, GDP per person in the US economy has grown at a remarkably steady average rate of around 2% per year. Starting at around $3,000 in 1870, per capita GDP rose to more than $50,000 by 2014, a nearly 17-fold increase.

Beyond the large, sustained growth in living standards, several other features of this graph stand out. One is the significant decline in income associated with the Great Depression. However, to me this decline stands out most for how anomalous it is. Many of the other recessions barely make an impression on the eye: over long periods of time, economic growth swamps economic fluctuations. Moreover, despite the singular severity of the Great Depression—GDP per person fell by nearly 20% in just 4 years—it is equally remarkable that the Great Depression was temporary. By 1939, the economy is already passing its previous peak and the macroeconomic story a decade later is once again one of sustained, almost relentless, economic growth.

The stability of US growth also merits some discussion. With the aid of the trend line in Fig. 1, one can see that growth was slightly slower pre-1929 than post. Table 1 makes this point more precisely. Between 1870 and 1929, growth averaged 1.76%, vs 2.23% between 1929 and 2007 (using “peak to peak” dates to avoid business cycle problems). Alternatively, between 1900 and 1950, growth averaged 2.06% vs 2.16% since 1950. Before one is too quick to conclude that growth rates are increasing; however, notice that the period since 1950 shows a more mixed pattern, with rapid growth between 1950 and 1973, slower growth between 1973 and 1995, and then rapid growth during the late 1990s that gives way to slower growth more recently.