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Tuesday, August 10, 2010

Economic Growth Miracles since 1950


This is a contribution to After catch-up, a thread on the Irish economy blog on what what sort of growth rates Ireland can reasonably be expected to achieve over the next decade or two.

Prof. Michael Spence’s Commission on Growth & Development has said that since 1950, 13 economies have grown at  an average rate of 7% a year or more for 25 years or longer. At that pace of expansion, an economy almost doubles in size every  decade.

Growth of 7% a year, sustained over 25 years, was unheard of before the latter half of the 20th century. It is possible only  because the world economy is now more open and integrated. Each and every one of these growth miracles had an export sector as a driver  of growth and an increasing share of trade in GDP. There are no
exceptions.

These countries are: Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan, and Thailand.

Ireland’s growth did not last 25 years as FDI and exports stalled just as the property bubble had enough self-sustaining propulsion, with the aid of the euro and foreign bank lending to keep the bubble fuelled until the rocket headed for earth.

The Commission said some 55% of China’s population is rural and 73% of India’s is rural. So there is still much room for development.

According to Deutsche Bank, the working-age population in India will increase by a stunning 240m (equivalent to four times the total population of the UK) over the next 20 years, compared with 10m in China.

The issue of demographics can of course be exaggerated give the advances in technology; I wouldn’t expect an ageing Germany to become moribund given its tremendous engineering reputation across
the globe.

Prof. Frank Barry’s paper: "These different perspectives also have different implications for the future. If the convergence view is correct, it suggests that we can now rest on our laurels: as long as we do not introduce inappropriate policies we are unlikely to fall behind average EU living standards. If the regional view is correct however, it suggests that external shocks to our ability to attract FDI might have serious long-term consequences for the economy. Foremost among these possible shocks would be a diminution of US FDI."

A country like Ireland, dependent on foreign firms for 90% of its tradable exports is of course very exposed.

Foreign firms are responsible for about 90% of China’s electronic exports and over 50% of exports overall.

However, the difference with Ireland is that the Chinese domestic market is important to multinationals and they have little choice but to accept China’s policy of linking FDI with development of its own indigenous sectors.

Commission on Growth & Development Report: 13 countries had sustained high growth - defined as 7% per year or more for 25 years or longer; Highlights four sets of countries where growth has stalled