Proposal preview

The Role of Economic shrinking for long term economic performance and catching up dynamics

Over the last sixty years, experiences of economic catching up, in which poor countries grow fast enough to narrow the gap between themselves and rich countries, have largely been erratic and unsustained. Episodes of growth follow interchangeably episodes of shrinking.
Economic growth over time, in simple arithmetic terms, is the sum of both growing and shrinking. As more information becomes available on the performance of economies around the world, it is clear that at least part of the stylized story about “growth” trajectories is too simple. We are all aware that periodically even the most advanced economies can suffer growth reversals where per capita income occasionally declines from one year to the next (e.g. the recession that began in 2008). What is perhaps less established is that faster growth over the long run is clearly associated with a reduction in the rate and frequency of shrinking. In fact among the economically most successful countries in the developed world since WWII, the explanation behind the economic performance is not more growth but rather less shrinking. In short, countries are rich partly because they manage to shrink less than poor countries. They shrink less when they shrink and years of shrinking are fewer. This leads to the conclusion that economic shrinking is an essential determinant for long run economic performance.
If, in the developed world, economic shrinking occurs relatively rarely, in the developing world a more diverse picture emerges. Had Sub-Saharan Africa kept its actual average growth record but mimicked the shrinking experiences of Asia since 1950, current GDP/capita in Sub-Saharan Africa would have been roughly three times higher. Instead we see how Asia since 1950 has forged ahead from other developing regions in general and Africa in particular. Again, this is not just an effect of a higher growth rates but also that it also shrank less. It seems that the success of economic development very much depends on a country’s resilience to economic shrinking and a major cause of “falling behind” is actually absolute economic shrinking of GDP per capita.
The aim of this session is to explore, both in the rear-view mirror of the developed world and a more contemporary perspective in the developing world, the dynamics behind this resilience, as well as lack of, resilience to shrinking. The reasons for this resilience are largely unknown. Still this may potentially be the key to understanding why poor countries can or cannot catch up. The most likely source of systematic patterns of economic shrinking lay in a country’s social capabilities or in the institutional arrangements that govern economic, political, and social relationships in different societies. The question becomes if there are identifiable patterns of capabilities or institutional arrangements that can be associated with societies that exhibit high rates and frequencies of shrinking, and how those arrangements differ from societies with low rates and frequencies of shrinking.
To explore these questions we invite papers discussing causes of, as well as resilience to, shrinking using both historical cases from the developed world and more contemporary ones in the global south.

Panel Organizers
Martin Andersson Associate professor Dept of Economic history, Lund University
Tobias Axelsson Assistant professor Dept of Economic history, Lund University
John Wallis Professor of Economics, University of Maryland

Organizer(s)

  • Martin MPA Andersson Lund University martin.andersson@ekh.lu.se Sweden
  • Tobias TA Axelsson Lund University tobias.axelsson@ekh.lu.se Sweden
  • John JJW Wallis University of Maryland Wallis@econ.umd.edu USA

Session members

  • Christer CG Gunnarsson, Lund University

Discussant(s)

  • Dani DR Rodrik Harvard Kennedy School dani_Rodrik@hks.harvard.edu

Papers

Panel abstract

1st half

Shrinking, Growing, Instability, and Institutions

John Joseph Wallis

Broadberry and Wallis (2017) show that increases in the rate of long run economic growth are caused by reductions in the rate and frequency of economic shrinking, not in an increase in the rate at which economies grow when they grow. This paper considers the implications of that result for institutions and institutional change. Political and economic instability appear to be closely related across countries and time. Instability occurs in the short run. When political instability threatens violence and possible civil war, the best response are institutional arrangements that stabilize political agreements in the short run. Those arrangements, however, appear to increase the likelihood of instability over the long run. The paper considers the conflicting incentives for institutional change that economic and political instability pose, and what path of institutional change might occur to lead to institutions that provide more stability.

Broadberry and Wallis (2017) show that increases in the rate of long run economic growth are caused by reductions in the rate and frequency of economic shrinking, not in an increase in the rate at which economies grow when they grow. This paper considers the implications of that result for institutions and institutional change. Political and economic instability appear to be closely related across countries and time. Instability occurs in the short run. When political instability threatens violence and possible civil war, the best response are institutional arrangements that stabilize political agreements in the short run. Those arrangements, however, appear to increase the likelihood of instability over the long run. The paper considers the conflicting incentives for institutional change that economic and political instability pose, and what path of institutional change might occur to lead to institutions that provide more stability.

Is resilience to shrinking more important than growth for long term development? The role of social capabilities among the Asian miracles - The case of the Indonesia

Martin Andersson Tobias Axelsson Andrés Palacio

Over the last sixty years, experiences of economic catching up, in which poor countries grow fast enough to narrow the gap between themselves and rich countries, have largely been erratic and un-sustained. Although even the most advanced economies suffer growth reversals, it is comparatively rare. Faster growth over the long run is clearly associated with a reduction in the rate and frequency of shrinking. One interesting case is the Indonesian half way miracle. In this paper, we ask ourselves how Indonesia during the period 1950-2010 went from helplessly backwards to one of the new miracles and a member of the G20.  Using a newly created index inspired by Abramovitz social capability approach we argue that Indonesia is showing increasing resilience to shrinking and less volatility in its growth pattern. 

Over the last sixty years, experiences of economic catching up, in which poor countries grow fast enough to narrow the gap between themselves and rich countries, have largely been erratic and un-sustained. Although even the most advanced economies suffer growth reversals, it is comparatively rare. Faster growth over the long run is clearly associated with a reduction in the rate and frequency of shrinking. One interesting case is the Indonesian half way miracle. In this paper, we ask ourselves how Indonesia during the period 1950-2010 went from helplessly backwards to one of the new miracles and a member of the G20.  Using a newly created index inspired by Abramovitz social capability approach we argue that Indonesia is showing increasing resilience to shrinking and less volatility in its growth pattern. 

The Philippines and Indonesia: Contrasts in Development over a Century: c1913 to 2015

Anne Booth

The Philippines and Indonesia both became independent countries in the aftermath of the second world war, but neither has managed to close the gap in per capita GDP with its former colonial power, the USA and the Netherlands. In Indonesia the gap is much the same as it was in 1940, while in the Philippines it is larger. The paper seeks reasons for this failure. It is argued that inequalities in income and wealth, inherited from the colonial era, have influenced economic decision-making over the last seven decades in ways which have often made it difficult for successive governments to implement growth-promoting policies. Both countries have also experienced periods of kleptocratic rule by authoritarian leaders who appear to have put the interests of their families and political associates above those of the nation.

The Philippines and Indonesia both became independent countries in the aftermath of the second world war, but neither has managed to close the gap in per capita GDP with its former colonial power, the USA and the Netherlands. In Indonesia the gap is much the same as it was in 1940, while in the Philippines it is larger. The paper seeks reasons for this failure. It is argued that inequalities in income and wealth, inherited from the colonial era, have influenced economic decision-making over the last seven decades in ways which have often made it difficult for successive governments to implement growth-promoting policies. Both countries have also experienced periods of kleptocratic rule by authoritarian leaders who appear to have put the interests of their families and political associates above those of the nation.

2nd half

Vietnam: The Economic Phoenix of Asia?

Montserrat Lopez Jerez

Economic growth is unquestionably necessary to sustain economic development, but it is not sufficient. A growing body of literature is focusing on a key component: the country’s resilience to economic shrinkage. Vietnam has experienced sustained economic growth since 1990, with an annual GDP per capita growth rate of 5.3 per cent, but how resilient is its economy? One might argue that the lack of shrinking is due to lesser integration in the world economy, but as a major commodity exporter this could be easily disputed. This paper explores this question by analyzing the Vietnamese economy in a historical and geographical perspective. We apply Abramovitz’ social capabilities concept to identify the possible factors driving the change towards a more sustained growth pattern compared to its earlier history.

Economic growth is unquestionably necessary to sustain economic development, but it is not sufficient. A growing body of literature is focusing on a key component: the country’s resilience to economic shrinkage. Vietnam has experienced sustained economic growth since 1990, with an annual GDP per capita growth rate of 5.3 per cent, but how resilient is its economy? One might argue that the lack of shrinking is due to lesser integration in the world economy, but as a major commodity exporter this could be easily disputed. This paper explores this question by analyzing the Vietnamese economy in a historical and geographical perspective. We apply Abramovitz’ social capabilities concept to identify the possible factors driving the change towards a more sustained growth pattern compared to its earlier history.

Individualism-Collectivism, Contract Enforcement, and Economic Shrinking

Avner Kreps Tian Chen Zeng

Through game-theoretic models and historical examples, we explain the empirical observation that more collectivistic societies have longer and deeper periods of economic shrinkage. We develop a model of contract-making with a third-party enforcer of variable identity, showing how increased collectivism impacts incentives towards bias in the enforcer, who determines the outcomes of failed contracts occuring during economic shocks. Biased enforcement increases investment in political conflict aimed at controlling the identity of the enforcer, which creates deadweight loss. Furthermore, as expectations of biased enforcement influence the shape of contracts, changes in the enforcer’s identity further disrupt the present network of relationships. These mechanisms make collectivistic societies both more prone to and more sensitive to economic shocks. Lastly, we theorize that the gradual updating of beliefs about the credibility of unbiased and institutionalized third-party enforcement in our model may explain the long-term expansion of social cooperation over time.

Through game-theoretic models and historical examples, we explain the empirical observation that more collectivistic societies have longer and deeper periods of economic shrinkage. We develop a model of contract-making with a third-party enforcer of variable identity, showing how increased collectivism impacts incentives towards bias in the enforcer, who determines the outcomes of failed contracts occuring during economic shocks. Biased enforcement increases investment in political conflict aimed at controlling the identity of the enforcer, which creates deadweight loss. Furthermore, as expectations of biased enforcement influence the shape of contracts, changes in the enforcer’s identity further disrupt the present network of relationships. These mechanisms make collectivistic societies both more prone to and more sensitive to economic shocks. Lastly, we theorize that the gradual updating of beliefs about the credibility of unbiased and institutionalized third-party enforcement in our model may explain the long-term expansion of social cooperation over time.

Expertise and Political Connections in English Parliament

Kara Dimitruk

This paper studies the role and evolution of elites’ expertise and political con- nections in English Parliament to supply a legislation changing property rights to land use. Using a dataset of the population of Members of Parliament (MPs) and their leadership and work on legislation, I find that a project was more likely to be approved if its manager had legal training as well as if he was connected to the monarch during the Restoration era (1660-1685). Current work is examining if and how this evolved after a shift in power away from the monarch with the Glo- rious Revolution of 1688. The findings shed light on the hypothesis that the onset of modern economic growth - or fewer episodes of negative economic growth and lower shrinking rates - is caused by a transition from identity-based to rules-based activity for elites.

This paper studies the role and evolution of elites’ expertise and political con- nections in English Parliament to supply a legislation changing property rights to land use. Using a dataset of the population of Members of Parliament (MPs) and their leadership and work on legislation, I find that a project was more likely to be approved if its manager had legal training as well as if he was connected to the monarch during the Restoration era (1660-1685). Current work is examining if and how this evolved after a shift in power away from the monarch with the Glo- rious Revolution of 1688. The findings shed light on the hypothesis that the onset of modern economic growth - or fewer episodes of negative economic growth and lower shrinking rates - is caused by a transition from identity-based to rules-based activity for elites.

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