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The Gerald R. Ford School of Public Policy at the University of MichiganThe Gerald R. Ford School of Public Policy at the University of Michigan

Accounting for growth

Tuesday, April 26, 2011
Accounting for growth image

Susan M. Collins and co-author Barry P. Bosworth, both senior fellows at the DC-based Brookings Institution, will release an update to their widely used growth accounts this spring. The data allow students, researchers, and policy analysts to compare and contrast the growth experiences of 84 emerging and industrial economies from 1960-2008, the period just before the recent economic crisis.

Eighteen years ago, Susan M. Collins had recently joined the Brookings Institution as a senior fellow when a colleague, Barry Bosworth, asked for her help with some research on international economic growth. The question that motivated them was simple: inspiration or perspiration? The answer, however, was complex.

In the field of international economic development, trying to understand why some countries struggle while others are able to achieve robust, prolonged periods of growth is a perennial question. One academic camp emphasizes perspiration, the other inspiration. Bosworth and Collins didn't know the answer, but they were interested in whether new data could improve our understanding.

"One of the things countries do to grow is the hard work of saving," says Collins. "You tighten your belts, you consume less, and you use those resources to invest so you can accumulate more capital." You might invest in roads, or ports, or factories, or tractors, or schools. That's the accumulation or "perspiration" dimension of economic growth, she explains.

The other dimension is "inspiration," or what economists like to call Total Factor Productivity—figuring out ways to produce more output (goods and services) with the workforce and capital on hand. These increases in efficiency might come from improving how firms organize their operations; or from making new discoveries like disease-resistant seeds; or smaller, faster computers; or the Internet.

Advanced and emerging economies face distinct challenges and opportunities with each of these paths. In more advanced countries, inspiration typically means new innovations, made possible through investments in research and development. Especially in poor and emerging economies, "it is more likely to be learning how to do things that other people have already figured out how to do—adopting existing technologies or implementing best practices," Collins explains. "For poor countries, postponing consumption in order to invest can be particularly challenging," says Collins, "but taking out loans to invest in roads or schools leaves countries in debt; so efficiency increases—such as from the adoption of existing technologies—promise a faster way for poorer countries to catch up."

To begin their exploration, Collins and her partner needed to compile relevant and reliable data for a large group of countries, across a long period of time. Eighteen years ago, putting all of that information together required extensive review of data from a variety of sources. They ended up with growth accounts for a total of 84 countries that are home to roughly 85 percent of the world's population and 95 percent of the world's GDP.

Over the years, Bosworth and Collins have used the resulting data often. They've compared single countries to regions, they've compared rapidly growing countries to slowly growing ones, and they've compared 'success stories' to one another. During 2003-2006, they used the data as part of an in-depth case analysis to understand why Puerto Rico's economy stopped catching up with the U.S. mainland—and what the commonwealth's policymakers might do to revive their economy. More recently, the growth accounts were the basis for a comparison of the growth experiences of China and India. With each study, Collins and Bosworth have learned that there's no single 'recipe' for achieving sustained economic growth. "It requires both perspiration and inspiration, as well as increases in education," says Collins, "and all of these pieces interact."

Collins is extremely cautious about over promising what the growth accounts can do. "They certainly don't provide all the answers," she warns. "However, these data are very useful as benchmarks and as starting points for further analysis. Growth accounts can help to set your compass and get you thinking."

This year, Bosworth and Collins were asked to do a study of growth experiences in the Pacific Rim. Because this dynamic region includes a diverse set of countries in Asia as well as the Americas, they decided to update the entire growth account dataset, which is now current through 2008. While Collins would love to have more recent data to take a look at how countries weathered the economic crisis, this will have to wait a few years, given lags in international data reporting. "Still, this is a good time to take another look," she says. Much has happened since the accounts were last updated, and this version will provide a pre-crisis snapshot that will facilitate intriguing comparisons in the future.

Collins notes that the most recent update confirms some interesting patterns and offers additional insights. Since 2000, for example, African countries have outpaced Latin American ones, she says; however, relatively little of that growth is due to perspiration. Instead, most of it seems to be associated with inspiration—more output given the available workers and capital. African nations are rapidly figuring out ways to use technologies—like cell phones—that are making them more productive. Other changes, such as extended periods of peace that allow people to focus on producing goods and services, are also part of the story. But for their growth to be sustained, these countries will eventually need to increase their capital, as well, by investing in roads, factories, and hospitals.

Increasing output per worker—a function of both perspiration and inspiration—is critical for raising the supply of goods and services available per person, says Collins. "It's essential for raising living standards," she explains, which is the ultimate objective of international economic development. "We don't know of any country that has done significantly better—pulled people out of poverty and substantially improved their well-being—without economic growth."

 


Below is a formatted version of this article from State & Hill, the magazine of the Ford School. View the entire Spring 2011 State & Hill here.