My last blog entry had emphasised high investment and saving rates as well as resource shifts in a dual productivity setting as major sources of sustained growth in China. In his famous Economic Backwardness in Historical Perspective, Alexander Gerschenkron (1962) argued that relatively backward economies such as Germany, France, and Russia during the nineteenth century could rapidly catch up to more advanced economies by undertaking large investments and adopting frontier technologies. DeLong and Summers (1991) had subsequently produced data that strongly suggest that high equipment investment is a cause, not a consequence of rapid productivity growth. Rapidly growing countries for the longer run were those where equipment supply curves had shifted outwards.
Acemoglu, Aghion and Zilibotti (2006) produced a growth model in which a country’s “distance to the frontier”matters for the selection of appropriate growth strategies. Countries at early stages of development (optimally) pursue an investment-based strategy, which relies on existing firms and managers to maximize investment. The three authors show that relatively backward economies may switch out of the investment-based strategy too soon, so certain policies such as limits on product market competition or investment subsidies, which encourage the investment-based strategy, may be beneficial. However, these policies may have significant long-run costs because they make it more likely that a society will be trapped in the investment-based strategy and fail to converge to the world technology frontier.
Perhaps unwillingly, the OECD has recently produced hard evidence that its ‘Going for Growth’ policy prescriptions can act to dampen rather than to encourage growth below a certain income per capita threshold. The OECD authors have computed the percentage point change in average annual GDP per capita growth for a given level of GDP per capita if the restrictiveness index of three policy areas would change by one index point. What does their graph below tell us?
While, regardless the per capita income level of a country, it is always bad for growth to erect barriers to entrepreneuship, deregulation of product markets, trade and foreign investment can harm rather than foster growth when and as long a country is poor:
- For the index of product market regulation, the yellow elipse marks those country groups where ‘Going for Growth’ prescriptions may actually reduce, not foster, growth; this refers roughly to those countries with a PPP-adjusted per capita income below 10,000$.
- The pink elipse indicates for barriers to trade and investment an even wide grouping of countries – extending to a per-capita income threshold of roughly 22,000$ - where higher barriers have gone along with higher, not lower, growth rates.
These are striking results that reinforce the point that not all policies are right at all moments in time for all countries. Extending deregulation and liberalisation policies that have worked in rich OECD countries to poorer emerging and developing countries must be done with great care, if sustainable growth is not to be impaired. GDP per capita, PPP-adjusted and in constant 2005 international dollars, in the large Asian emerging countrieswas in 2010 still quite far below the income thresholds from which “Going for Growth’ prescription can be expected to work: China 6,810$; India 3,240$; Indonesia 3,880$. These countries are well advised to go for growth with Gerschenkron. By contrast, Brazil (10,056$) and South Africa (9,476$) have now approached the per-capita income threshold from which product market regulation can do more harm than good to growth.
 Equipment investment and economic growth. Quarterly Journal of Economics, Vol. 106 (1991), pp. 445–502.
 “Distance to frontier, selection, and economic growth”, Journal of the European Economic Association Vol. 4 (1), 37-74.
 “Product Market Regulation: Extending the Analysis Beyond OECD Countries”, OECD Economics Department Working Papers, No. 799