Media Briefings

TRILLIONS GAINED AND LOST

  • Published Date: April 2014

TRILLIONS GAINED AND LOST: New evidence of the enormous impact of growth accelerations, decelerations and collapses on people’s lives

Massive changes in economic growth are common in developing countries, with most having experienced distinct episodes of growth accelerations, decelerations and/or collapses. New research by Professor Kunal Sen (University of Manchester) and colleagues, presented at the Royal Economic Society’s 2014 annual conference, reveals the impact on people’s lives of these staggering gains and losses in income over relatively short periods.

Their study estimates the loss and gain in income in growth episodes by identifying breaks in GDP per person for 125 countries over the past 60 years. Among the findings:

· India was known for its ‘Hindu’ rate of growth till the late 1980s. Economic growth accelerated in 1993, and then again in 2002, and the combined income gain from these two growth accelerations was the equivalent of $3.7 trillion.

· Brazil was a ‘miracle’ country from 1967 to 1980, growing at 5.2% per year. Growth slowed down sharply in 1980 to essentially zero and stayed low until 2002. The lost of output from this slowing of growth was the equivalent of $61,000 per person.

· The slowdown in growth in Iran that lasted from 1976 to 1988 cost each citizen $146,643, a loss 11 times initial GDP per person.

· Particularly tragic are the growth decelerations in Africa, where income fell from a particularly low base. For example, the growth deceleration in Malawi that began in 1978 cost each person almost $10,000.

The authors comment:

‘The gains in income gains and losses that we document are too large to be explained by policy reforms that cannot provide such big effects, even with pre-existing large distortions in the policy environment.

‘Neither can they be explained by changes in fundamental determinants of long-run per capita income such as institutions, which by their nature are slow-moving and sticky.

‘What explains such staggering gains and losses in income over relatively short periods is the key question that future research on economic growth should address.’

More…

Why are there such significant and persistent differences in living standards across countries? This is one of the most important and challenging areas of development policy. For individual countries in the developing world, extreme fluctuations in growth over a relatively short period of time can cause staggering changes in living standards. Income gains and losses of as much as three times GDP capita have affected whole populations.

This research aims to understand the causes of such economic growth. First, we need to understand what growth is. The researcher show that economic growth in developing countries is an episodic phenomenon – massive discrete changes in growth are common in developing countries, with most developing countries experiencing distinct growth episodes: growth accelerations and decelerations or collapses.

For example, India was known for its ‘Hindu’ rate of growth till the late 1980s. Economic growth accelerated in 1993, and then again in 2002, and the combined income gain from these two growth accelerations was 3.7 Trillion Purchasing Power Parity (PPP) dollars.

In contrast, Brazil was a ‘miracle’ country from 1967 to 1980, growing at 5.2% per annum. But growth decelerated sharply in 1980 to essentially zero and stayed low until 2002. The net present value of the lost output from this slowing of growth is estimated to be 7.3 trillion PPP dollars, a loss of 61,000 dollars per person.

The growth deceleration in Iran that lasted from 1976 to 1988 cost each citizen $146,643, a loss 11 times initial GDP per capita and over five trillion dollars.

Particularly tragic are the growth decelerations in Africa, where income fell from a particularly low base. For example, the growth deceleration in Malawi that began in 1978 cost each person cumulatively almost 10,000 dollars.

Thirty growth acceleration episodes in the post-World War II period have seen income gains (in net present value terms) at least three times the initial level of GDP per capita at the beginning of the episode. Thirty-two growth deceleration episodes in the same period have seen income losses (again, in net present value terms) that have exceeded three times the initial GDP per capita at the beginning of the episode.

To estimate the loss and gain in income in growth episodes, the researchers first identify structural breaks in GDP per capita for 125 countries, over the period 1950-2010. Once they know the timings of accelerations and decelerations in growth episodes, they estimate the magnitude of growth in these accelerations and decelerations.

They compute the total net present value of the difference between the actual trajectory of output during the episode and the counterfactual of what the trajectory of output would have been in the absence of the onset of the growth episode. To obtain the counterfactual trajectory of output for each growth episode, they use a regression for each country/episode to allow ‘predicted’ growth to depend on a country’s initial GDP per capita, the episode period specific world average growth (to capture ‘global business cycles’) and the previous period’s rate of growth.

The gains in income gains and losses documented in this study are too large to be explained by policy reforms that cannot provide such big effects, even with pre-existing large distortions in the policy environment. Neither can they be explained by changes in fundamental determinants of long-run per capita income such as institutions, which by their nature are slow-moving and sticky.

What explains such staggering gains and losses in income over relatively short periods is the key question that future research on economic growth should try and address.

ENDS

Notes for editors:

‘Trillions gained and lost: estimating the magnitude of growth episodes’ by Lant Pritchett, Kunal Sen, Sabyasachi Kar and Selim Raihan

For further information, contact:

Professor Kunal Sen, kunal.sen@manchester.ac.uk, 07963 006107, 0161 275 0967.

Romesh Vaitilingam: romesh@vaitilingam.com, +44 7768 661095