Sunday, October 16, 2011

Is economic growth inevitable?

I have been coming across a lot of pessimistic talk about the future of the global economy. From BBC's Paul Mason, pondering the Occupy protests in Britain:
Basically we are in danger of a global stagnation - it was HSBC's economics team that described it as a permafrost. It poses the question "who pays for the banking crisis" very acutely. And large numbers of people are now realising it is going to be them, and more painfully, their children.
And from Eleanor Fitzsimons at The Antiroom blog:
It is becoming increasingly clear that the traditional economic models, originally developed in response to the imperative of paying for the costly Second World War, have failed the vast majority of the world’s citizens. We lurch from one financial crises to another with the most vulnerable feeling the worst effects of austerity and many millions in the developing world, having never benefitted from any so-called boom, now facing the deadly consequences of the bust.
So how does stagnation, or the lurching from one crisis to another look? From the World Bank, a graph of global GDP per capita at current US$, since 1960:
Let's break it down a little. In 1960 the global average was $445.40. In 2008 it was $9,161.10, twenty times higher. In 2009 it fell to $8,586.80 and by 2010 it was back up again, higher than it was in 2008. So the crisis, the stagnation, was one year of dip that has already been recovered from.

Remember that this is GDP per capita, over a period in which population was soaring. That means that raw GDP growth must have been phenomenal. It was, global GDP rose nearly 47-fold in fifty years. Since 1971 annual GDP actually declined only once, in 2009.

There are objections to this, of course. We can't see from this graph who was getting the benefits of the growth. Few people would be satisfied if all the growth in wealth went to a superrich elite. A crude way to get more information is to break the world into low, middle and high income countries, which the World Bank does here:
In the 1970s the high income countries grew, just about, while low income countries bounced between high growth and significant declines. Middle income countries did best. In the early 1990s the low income countries declined again. Yet since then they have only grown. For them the 2009 recession was growth of 4.7%, while the rich countries endured decline of 3.5%. The middle income countries have done well too, weathering the 2009 storm and bouncing back to 7.7% growth in 2010.

At an international level, then, we're seeing convergence. (Also, note how rare it is to see decline of GDP at all. It tends upwards.)

Let's look at two more major indicators of well being. First, life expectancy:
And infant mortality:
The macro view of the world over the last few decades is incredibly positive. High long term growth. High growth among the low and middle income countries. Drastically improving health indicators. The world economy is not lurching from one crisis to the next. Instead it seems locked into perpetual upward momentum.

All this should be obvious. I am just a few generations from squalor and poverty, living in one-roomed cottages with tiny patches of land to farm, paying rent to landlords who lived in Britain. A few generations more from famine and plague, a few more from religious repression, ethnic cleansing and catastrophic war. Now I look out my window onto a mowed suburban lawn, a few children playing noisily on a sleepy Sunday afternoon.

People who call for radical change should remember that this is what they are jeapordising. The rich get richer. The middle get richer. The poor get richer.

4 comments:

  1. Well then life must be much better in the U.K. and Europe than here in the U.S.

    The prevailing trend here, especially the last ten years, is that the wealth is becoming more and more concentrated in fewer hands, the middle class is disappearing, and the poor are poorer than ever.

    Presently in the U.S., the top 1% own 42% of the nation's wealth. And the top 5% own 70% of the nation's wealth. We rank below China, India, and Iran in income equality (#93 ... far behind developed European nations like Sweden and Germany).

    Yes, company profits are higher than ever. But most Americans are not feeling it at all.

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  2. Yes, oddly enough an Irish friend just sent me this:
    http://www.nytimes.com/imagepages/2011/09/04/opinion/04reich-graphic.html?ref=sunday

    There are a bunch of things that occur to me. First, if life is so awful in the US, why aren't people emigrating? Why are Americans not going to Canada or Sweden? Instead the US is still experiencing massive immigration from Latin America. In Ireland people are very responsive to the economy: we had massive emigration in the stagnant 80s, huge immigration in 90s and 2000s, and immediate emigration after the economic crisis hit. Lots of Irish are now going to the US.

    Second, that very migration might have distorted our understanding of inequality in the US. During the 1980s-2000s there was huge scale immigration of very poor Latin Americans. This meant that the lowest, say, fifth of Americans would have gradually have looked like its income was DECREASING, only because it was being refreshed by poor immigrants all the time. I'd love to see the figures broken down a bit: have poor white and black Americans grown poorer or richer over this period?

    All that said, I know income inequality has grown a lot in the US over the last few decades. I've seen some people blame globalisation and free trade, moving industrial jobs out of the US to cheaper labour abroad. From an Irish perspective, there is little sympathy, because Ireland boomed in the late 1990s with a low corporate tax rate that attracted big American companies. Likewise China, Indonesia, Taiwan, Malaysia, and so on experienced serious industrial and economic growth, along with massive development of middle classes. So if a few rich countries lose some of their middle classes so that poorer foreign countries can gain them - fine! That to me looks like the global system actually decreases inequality by itself, shifting manufacturing jobs from rich countries that don't need them so much to poor ones that desperately do. Today many of the fastest growing economies in the world are in Africa. This is fantastic news!

    Finally, even though the US isn't particularly impressive by developed world standards for health indicators, life expectancy is still gradually rising, from 77 in 2000 to 78.7 today.

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  3. In REAL terms pretty much all sectors have become much richer over the past 50 years. We dont need financial stats to prove it just look at house ownership for example over sucessive generations. Speaks for its self.
    BUT i can see an intrinsic fault with the 'growth' model that our economist friends all seem to want to use... surely when any country becomes developed to the extent that most of the west is there is much less potential for further growth....If we assume that overall world activity is limited then I dont see the current flatlining as such a big surprise....its logical that the growth has to take place in the countries where the potential is greatest, ie outside the west.
    Simplistic but not easy to dispute.

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  4. Yeah, the richer countries do seem to grow more slowly than poorer, developing countries. I've read some argue that growth has been heavily related to access to energy. So coal helped the first lurch into the industrial revolution. Oil led to the auto-revolution of cars and planes. Nuclear boosted electrical supply. But we are still largely reliant on oil for transport. So if oil supplies decline are we facing ever-slowing levels of growth? On the other hand if new technologies push through new energy sources maybe we could enjoy another boost. I guess aging populations is a problem too. The future may not be as rosy as the recent past.

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