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The Rediff Business Special/The Economist

A century of progress

The flow of reflections on the past century, prompted by the calendar and by mankind’s sensible preference for round numbers, continues unabated. This week, with the publication of its new World Economic Outlook, even the normally austere IMF has indulged itself, with a chapter on the subject, and a supporting paper by Nicholas Crafts, of the London School of Economics. The Oxford Review of Economic Policy recently devoted a whole issue to the theme. And Brad DeLong, of the University of California at Berkeley, is about to add a book to the genre: in a neighbourly gesture, he has just circulated drafts of the first two chapters as working papers for the National Bureau of Economic Research.

Several themes come through strongly in all these commentaries. One is the striking singularity of the 20th century. The growth achieved in the past 100 years is awe-inspiring when you see it in the context of the centuries that went before.

In the 19th century, with the industrial revolution vigorously under way in Europe and America, Karl Marx could write that the capitalist class “during its rule of scarce one hundred years, [has] created more massive and more colossal productive forces than have all preceding generations together. The subjection of nature’s forces to man, machinery, the application of chemistry to industry and agriculture, steam navigation, the railways, electric telegraphs, the clearing of entire continents for cultivation... [What] earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?” Marx was right. Yet, as Mr DeLong points out, “Compared to the pace of economic growth in the 20th century, all other centuries—even the 19th that so impressed Karl Marx—were standing still.”

As the catalogue of industrial innovation expanded remarkably during the 19th century, GDP per head grew at between 1 per cent and 1.5 per cent a year in Britain and America. In the 20th century, as the pace of innovation accelerated, incomes per head grew faster as well, at a little under 2 per cent a year. Sustained for decade after decade, growth at these rates roughly doubled American GDP per head between 1870 and 1913, then raised it almost by a factor of five between 1913 and the mid-1990s. Yet those annual growth rates look rather puny, don’t they?

Allowing for growth in population of around 1 per cent a year, America’s long-term growth in incomes per head is estimated today at between, say, 1.5 per cent (by old-economy stick-in-the-muds) and 3 per cent or more (by new-economy enthusiasts). One thing you learn from looking at the history of growth is that very dramatic things indeed need to be happening if growth per head is to be kept even as high as 2 per cent in the leading-edge economies. The kind of economic miracle posited today by the most optimistic new-paradigmists implicitly regards current innovations in networked computers and telecommunications as not merely on a par with the greatest breakthroughs of the past two centuries, but as greater and more far-reaching.

Which is by no means to say that the new-paradigmists must be wrong. For the most part, the authors of these commentaries are sceptical: it would be difficult for economic historians (reluctant even to speculate except on the basis of decades of data) to be anything else. Just as Marx failed to envisage progress faster than he had witnessed in his own time, so today’s new-economy sceptics may have fallen victim to a failure of imagination. What history does teach, though, is that “old-economy” growth rates are not “normal” in any long-term historical sense: they are already exceptional. The new-paradigmists are arguing that a new economic miracle has been superimposed on the one that was already going on. While not necessarily false, that is a very much bolder claim than most of its advocates appear to understand.

A second main theme concerns inequality. The gap between the richest and the poorest countries has widened dramatically during the past century.

This is partly because the richest countries have been rapidly getting richer, but also because many of the poorest countries have been getting poorer. Mr Crafts points out that incomes per head in Mozambique fell from roughly $1,000 a year in 1950 to roughly $850 in 1990, whereas in America they went up from nearly $10,000 to nearly $24,000 (all at 1990 prices). Incomes in Mozambique in 1990 were lower in real terms than incomes anywhere in Europe (east or west, including Russia) in 1870.

The picture is a bit less bleak, as Mr Crafts points out, if you consider broader measures, such as the Human Development Index (HDI), a statistic proposed by the United Nations Development Programme to capture the escape from poverty, and which includes data on education and health as well as incomes. Using this yardstick, Mozambique in the 1990s is better off than some parts of Europe were in 1870—admittedly, a reminder of how far Europe has come as much as any tribute to progress in Mozambique. And according to the HDI, global inequality has fallen sharply since 1950.

Policy matters a lot, the authors find, a point particularly stressed by Mr Crafts. The poorest countries can hope to catch up if they establish the basic economic institutions (starting with property rights and the rule of law) and do lots of other things right. They are not bound by the leading-country limit, wherever that may lie. East Asia, its recent troubles notwithstanding, has shown what can be done. On the other hand, history suggests that catching-up is more than a matter of merely avoiding mistakes. Getting everything right at once, and adapting as circumstances change, is as difficult for the laggards as it is for the leaders to keep pushing that ceiling.

By arrangement with The Economist

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