Growth Miracles and Growth Disasters

Are poor countries catching up to rich countries, or are they falling further behind? Said another way, is there divergence or convergence between standards of living in different countries over time?

Let's start with what economic historian Deirdre McCloskey calls "The Great Fact" about the modern world. If you graph global economic output over the past 2000 years, you'll see this -- what we’ve referred to earlier as the hockey stick of human prosperity. Now let's look at that same data, not at a global level, but by region. Since the Industrial Revolution, the growth paths taken by different regions have diverged dramatically. The U.S. and Western Europe experienced the hockey stick path of growth, while other regions have stagnated. This was described as "Divergence, Big Time" in a famous economics paper. But that's not the whole story either.

Let's dive into this data even further, down to the country level. Here's Argentina in 1950. It's a relatively successful economy with a standard of living similar to many Western European economies. Now here's Japan. At the time, they're quite poor, with a standard of living similar to Mexico. But let's move forward in time. Japan begins growing at an astonishing pace, doubling their living standards about every eight years. Argentina, on the other hand, experienced periods of negative growth. They managed to double their living standard just once in 65 years. By 2015, Japan -- it’s one of the most prosperous countries on Earth. Argentina, on the other hand -- it stagnated. It went from double the standard of living in Japan in 1950 to Japan being twice as prosperous as Argentina today. Japan is a growth miracle, with a standard of living over 10 times higher now than in 1950.

Other growth miracles have occurred in South Korea and China. And India today looks like it may have started down the hockey stick path of prosperity. So, the good news is that with the right factors in place, a poor country can not only grow, but it can grow quickly and catch up to developed countries. What took the United States 200 years of steady growth can be achieved in other countries by rapid growth, in about 40 years. Catch up can happen in a generation or two.

The bad news is that it's not guaranteed. Some countries, like Argentina -- they grow well for a time and then they stall. Even worse are countries such as Niger or Chad which have never experienced significant growth. They're the worst kind of growth disasters –- extreme poverty with very little growth at all. And it's important to remember that these are more than just numbers. A growth miracle means not just more goods and services, but better health and greater happiness for millions of people. See our earlier video showing how GDP per capita is a good summary measure of a country's standard of living.

On the other hand, growth disaster -- it means the opposite. People are less prosperous and they live shorter, and less happy lives. So, growth miracles and growth disasters -- they're possible. But what are the causes? What are the factors that lead to growth, prosperity, health, and better lives? That's the topic we're going to turn to next.