Economic Growth

Overview: How much does growth matter?

How well off are you?  How well off is a nation?  What is the standard of living?  What is the quality of life?  What is the level of national income or output?  If I asked you the question, you would know that the quality of your life is not perfectly related to how much money you earn.  You know some extremely happy people with limited incomes, and some miserable people with BIG incomes.  We talked about this earlier in the description of GDP, the primary measure we have of a county's income level.  In this unit on economic growth, we will be taking a narrow perspective and focusing attention on traditional measures of economic growth such as GDP, and ignoring other factors that would most likely be included in someone's assessment of quality of life - life expectancy, health, education, and freedom might be included in a broader measure.  The United Nations now reports annually on the Human Development Index (HDI) that combines information on GDP per capita, life expectancy, and education (literacy and school enrollment) into a single number.  We will examine the GDP data knowing that it is only one dimension of quality of life, but also knowing that Easterlin reports, based on a survey of people's measure of well being in 12 countries, that living level is at the top of the list of people's concerns.  Furthermore, many of the indicators of well being tend to be related. 

When using GDP as a standard of living you should, however, be aware of one additional limitation pointed out by Easterlin (p11).  What's not reflected in the GDP numbers are qualitative differences in life.  

"The transformation of living levels has been qualitative as well as quantitative. By comparison with the conveniences and comforts widely available in developed economies at the end of the 20^th century, everyday life two centuries ago was most akin to what we would know today as 'camping out.' In the late 18^th century United States (which even then was a relatively rich society), for example, among the rural population, which comprised 95 percent of the total, housing consisted of '[one] story log houses and frame houses with one or two rooms and an attic under the rafters…Cellars and basements were practically unknown and frequently there was no flooring except the hard earth. The fireplace with the chimney provided heating and cooking…" water and wood had to be fetched, and it was outdoors for the toilet. some candles, but no glass. And let's talk about medicine - bleeding was in vogue in early 19^th century.

How much does economic growth matter? To most observers it matters a lot.  To Hamish McRae who wrote The World in 2020, "[t]he success or failure of any country over the next thirty years hinges on growth." Economic growth will be necessary because of continued growth in population.  Although the rate of population growth shows signs of slowing, the world's population will continue to expand by tens of millions a year for many years to come. There will be more mouths to feed and successful national leaders will not lose sight of the fact that nations " justify their existence, in large part, by securing their citizens' well-being, whether by creating and maintaining jobs, providing a social safety net, or protecting the environment."  

As we saw in the earlier section on opportunity cost, economic growth, through greater efficiency in the use of its resources, provides nations with an alternative to territorial expansion. The challenge facing policy makers is how to make this economic growth less damaging to the environment since it is unlikely that environmentalists' calls for slower growth will be heeded by policy makers.  In this section we will look at two related questions.  The first has to do with growth differentials: Should we be worried about a difference of 1 or 2 percentage points in the growth rate? The second has to do with understanding the patterns of economic growth and the factors responsible for differential growth rates.  We will end with a discussion of the critical role of productivity growth in linking inflation and economic growth. 

When we look at the track record of countries that experience economic growth, a pattern emerges where there seems to be a turning point that divides a period of slow growth from a period of fast growth.  In the table below (Easterlin), we see the turning point began in 1820 for England and Wales and ended in 1945 for India.  Differences in the two time periods is evident in the differences in fertility rates, life expectancy, and GDP growth rate.  For example, in the fifty years before the turning point, the fertility rate in France declined .1 percent a year, while in the fifty years after the turning point it declined .9 percent per year.  Life expectancy also changes sharply, rising 5.8 years in Japan in the fifty years before the turning point and 30.8 years in the following fifty years. The turning point also was associated with a speed up in growth - from an average annual growth rate of .1 percent in Brazil before the turning point to 1.7 percent after the turning point.   

Should we be worried about a difference of 1 or 2 percentage points in the growth rate?

The answer depends in large part upon the time horizon you take.  Small differences in growth rates will not make much of a difference in the short-term, but in the long-term they matter a lot.  For example, look at future income of a 20 year old earning $1,000 every two weeks. If we look only three years into the future, the difference between a 1 and 3 percent per year growth rate is approximately 6 percent ( 9.3 vs. 3.03 percent). At a growth rate of 1 percent, the $1000 will grow to $1030, while a 3 percent growth rate will result in an income level of $1090.  The $60 difference is a difference of 6 percent. [The numbers are based on the simple mathematics of growth that is at the center of present value analysis.]

FV @ 1 percent = $1,000*(1.01)³ = $1000* 1.0303   = $1,030
FV @  3 percent = $1,000*(1.03)³  = $1000*1.0930 = $1,090

When we move the time frame back to 30 years, however, the gap widens to more than 100 percent. If we expect income to grow at 1 percent, the $1,000 will reach $1,348 in 30 years, substantially less than the $2,427 which we would have at a three percent growth rate.

FV = $1,000*(1.01)³⁰  = $1000* 1.348  = $1348
FV = $1,000*(1.03)³⁰  = $1000*2.427 = $2427

The long-term significance of the growth differential can be seen in the diagram below.

Diagram 1

The significance of small differentials can thus be rather significant when we take the long view, which is why we will now review the 'facts' concerning where growth has occurred and a discussion of the determinants of growth to explain why countries grow at different rates.

It is also true that there are a number of positives that accompany economic growth.   experience  When you look at the pattern of economic growth across a set of nations, you tend to find similarities.  One of the points raised by Easterlin 33

How big is the differential?  BIG

Economic Growth: Where, When and Why?

We have now seen how even small differentials in growth rates can have dramatic effects on the levels of economic activity in the 'long-run.'  It is now time to turn our attention to questions we have glossed over - which countries are growing, how do we explain economic growth, will economic growth bring about convergence or divergence, and how do we achieve / promote economic growth? In our discussion of economic growth it is important to note that not everyone has boarded the economic-growth-is-good bandwagon.  The anti-growth movement has been around for many years and in recent years it has been associated with the environmentalist movement.  It is not hard to see why.  What will happen to the levels of pollution if China ever does succeed in achieving a level of development experienced in the US, if the Chinese turn in their bicycles for cars and if they want TVs, refrigerators, air conditioners and the array of other appliances that require electricity?  If you extrapolate from today's figures you end up with a very dirty, warm, and potentially dangerous world. The table below, containing data on energy consumption for the US, China, and India, reveals the striking differences between a developed and less developed country.  Energy consumption per capita in the US is twelve times higher in the US than China and nearly thirty times as high as that in India.

But what happens if they catch up?  What happens if they succeed at growing their economies and start living like Americans and Europeans?  In the table below we look at world energy demand in 2050 based on projected population growth if there is some catch up.  In the first two columns we have estimates of energy consumption if energy per capita rates do not change.  Energy demand in these three countries would increase from 142 to 185 QBTUs.  But what if there was catch up and these two countries had energy per capita consumption equal to one half the US average.  These numbers appear in the last two columns.  Energy consumption for  India and China would far exceed current US use, and total energy use in these three countries would reach 650 QBTUs - nearly five times current use and approaching twice total current world energy consumption - and this is without growth anywhere else.

But is the danger from economic growth is no greater than the dangers in a world without economic growth.  The sentiments regarding free trade expressed by Treasury Secretary Larry Summers are just as relevant for discussions of economic growth.  

"Fundamentally, the case for free trade is the case for the market system. The benefits come in the form of greater realization of the efficiencies available from specialization. ... Another set of arguments is political —having to do with the claim that economic integration engenders greater political stability and reduced potential for conflict."q

One of the reasons economic growth can reduce the pressure for conflict is that any existing inequality can breed conflict as the 'have nots' try to reduce the differential,  to get their share.  There are two possibilities for redistribution - taking from the rich and giving to the poor, or growing and giving the poor a larger share of the growth.  In both cases there will be convergence, but the 'politics' of the two choices will be quite different as the first is likely to be more forcefully resisted.  We see a similar situation when we look at the distinction between real vs. nominal wages.  Although a 2 percent decline in wages in a zero inflation environment is the same as a 2 percent wage increase in a 4 percent inflation environment, the former is likely to be resisted more forcefully than the latter. 

As valuable as economic growth may be, not all countries have managed to achieve sustained growth.  According to the World Bank, in 1997 GNP per capita in the wealthiest countries was 74 times larger than in the poorest countries - a differential that shrinks to 16 times when purchasing power parity measures of GDP are used.

Diagram 1

What does this mean in terms of total world output?  In 1997, the 16 percent of the world's people who lived in the wealthiest countries earned 84 percent of the world's income, while the 55 percent of the population living in the poorest countries earned 4 percent of the world's income.  

Diagram 2

Are the differences in income declining?  Will there be a convergence in incomes?  One way to answer the question is to look at the historical experience of the US.  By the mid 19th century, improvements in transportation and communications technology were increasing the interaction between the high income and low income regions in the US.  The result was a pronounced convergence in regional per capita incomes.  Incomes in the Northeast (NE) which were approximately 50 percent above the national average at the outbreak of the Civil War, and in the Southeast (SE) where income had fallen to 50 percent of the national average after the War, began to converge by the late 19th century.  This convergence was so complete that by the late 20th century the differentials had all but disappeared.

Among the world's high-income industrialized nations, there is also a pattern of convergence.  According to data reported by Maddison, between the years 1870 and 1960 nations with high initial levels of income (Australia) grew more slowly than nations with low initial income levels (Japan).  The same cannot be said, however, when we move beyond the industrialized nations.  Prichett (1997) has concluded, based on his estimates of per capita incomes since 1870, that there has been a substantial divergence between the incomes of wealthiest and poorest nations.  According to his calculations, the ratio of per capita income in the US to that in the poorest country has risen five-fold between 1870 and 1990 - from nine to forty-five.  Taking a somewhat shorter perspective and using the World Bank's data, we find that some countries have managed to escape the poverty trap, but others appear to have been unable to escape.  In the 1980s the dominant trend was divergence with income per capita growing in the high income countries at a rate of 3.2 percent, higher than the growth rate of the middle and low income nations in all regions except Asia.  The situation changed in the first half of the 1990s with growth slowing to 2 percent in the high income nations so they were "outgrown" by all regions except the sub-Saharan Africa, where income was growing at the same rate, and Central Europe and Asia (Transitional countries of former Soviet Union), where output was actually falling.

In addition to the inequity, there has also been a slowdown in economic growth that has affected all of the industrialized countries.  The GDP growth rates in the table below clearly show a slowdown across all of the countries after 1973, a slight rebound in the late 1980s, and a slowdown in the recession of the early 90s.  This slowdown has been the focus of considerable research which we will discuss in the next section as we look at the determinants of growth and try to explain the differentials.  

Economic Growth
(GDP annual rates of change)

Models of Economic Growth

It should now be quite clear that enormous differences exist in the levels and growth of income and divergence is an all too common feature of the growth process.  What we now want to turn our attention to are the secrets of growth.  Are there any factors which we can identify to explain the differences - any policies that might be adopted to speed up the process of growth?  This is certainly what Kennedy was looking for in 1960 when he set about the task of getting "the country moving again." It was also Ronald Reagan's goal in 1980 and Bill Clinton's goal in 1992. 

As a first step toward understanding the process of economic growth, let's look at a very simple example where we have Chris and Gene, two fishers who spend all day fishing by hand and each  catches one fish a day - barely enough to survive. All of Chris's and Gene's efforts would be used to meet basic survival needs and as a result their' situation would likely be the same in five years as it is today.  Chris and Gene lived 'hand-to-mouth' and there was nothing likely to change this since each day was devoted completely to producing enough to survive. 

Anyone who has fished, or at least watched shows on fishing, realizes this is not the "best" way to fish.  Imagine Chris finding an area with many more fish so he could catch his fish in half a day.  He could use the remaining time to experiment with new techniques including a fishing rod.   Chris, by saving some time from fishing to devote to creating the fishing rod, could expand his catch to five fish per day.  With the investment in this capital, output could increase five-fold - we are seeing economic growth.

The story is not over yet since the higher level of output by Chris would mean that enough food was being caught to feed more than just Chris. One possibility would be the higher level of income allowed Chris the opportunity to have a larger family and the increase in the number of mouths to feed meant the larger family was still at a subsistence level.  There may be growth, but there is no progress or increase in the standard of living.  This scenario is generally consistent with Thomas Malthus' Classical Model of economic growth.  According to Malthus, economic growth could temporarily move a nation above the subsistence level but this produced a population boom and eventually the additional mouths which needed to be fed returned the nation to a subsistence level.  This rather dismal view of economic growth is what got economics dubbed "the dismal science."

Fortunately, there is another possibility.  What if Chris used the fishing rod for only one-fifth of the day and caught the one fish needed to survive.  With the time saved by the new fishing rod Chris did some research and came up with a new approach to fishing.  Chris discovered a boat which allowed him to fish offshore where there were more fish.  Now the output of fish could be expanded twenty-fold if Chris could use some of the freed up time and produce a boat.  Even if Chris's family size increased, we would be experiencing economic growth and an increase in the standard of living.   If we followed on with the 'logic' we would find the key to the economic growth was productivity growth - how many fish could be caught in an hour. In fact, this process could continue indefinitely as long as productivity grew faster than population.  Furthermore, for this to happen economic growth would have to be associated with the creation of an entire new industry, boat building, and you could easily see where this could lead.  There would be a factory built to construct the boats, a logging industry to harvest the lumber, a machine-tool industry to make the tools to build the boat.

The second scenario is generally consistent with the views on economic growth expressed by Adam Smith.  Smith identified specialization and the division of labor as the keys to economic growth.  If a nation's resources could be employed where they were most productive, then we would get more from these resources. 

The difference between the two views can be demonstrated  with a simple equation - an identity where income per capita [income (Y) divided by population (P)] is defined as the product of two terms. The first of these terms Y/L is labor productivity - how much output (Y) is produced by workers in the labor force (L). The second term is the percentage of the population in the labor force.  [If you do the cross multiplication you end up with Y/P on both sides of the equation].

(1) Y/P = (Y/L)*(L/P)

Using equation (1), with a little more algebra, we can generate an equation (2) for the growth rate in income per capita (y/p). The growth rate in income per capita, a common definition of standard of living, is the sum of the growth rate in output per worker (y/l) and the growth rate in the labor force / population ratio (l/p).  The first of these terms is simply the growth rate in labor productivity, what Adam Smith saw as the engine of growth. We'll call this intensive growth - growth occurs because we are getting more "stuff" from our workers.  The second term is a measure of the share of the population working - or more accurately, the growth rate in the share of the population that is working.  We'll call this extensive growth since the growth occurs because the number of people in the work force is growing.  The best example of this would be the movement of women out of home into the labor market which tended to increase the supply of labor faster than the growth in the population. 

(2) (y/p) = (y/l) +(l/p)

The bottom line, income per capita growth occurs if there is an increase in the percentage of the population in the labor force or an increase in the rate of labor productivity growth. While these are both sources of growth, there is a significant difference between the two.  Extensive growth, growth attributed to growth in the participation of the population in the labor force, has an upper bound so it cannot be viewed as a permanent source of economic growth.  You can think of this as growth attributed to working harder - fishing longer hours.  Intensive growth, meanwhile, is attributed to growth in productivity and is sustainable indefinitely.  For this reason it has been the focus of considerable research directed at uncovering the 'secrets' of increased productivity.  Where Malthus saw only limited possibilities for intensive growth,  Smith saw enormous potential for this type of growth.  What others saw in the productivity growth was the cost-disease of the service sector, a concept that is at the center of any discussion of cost / price increase crises in the health care and education sectors.  Here is where you look for explanations for the continual increase in tuition costs and for the secrets of any solution to these escalating costs.  

But where do these increases in productivity come from?  The growth in productivity can originate in four sources: structural change in the economy, savings and investment, increased quality of labor, and research and development.  

Structural Change

One of the features of economic growth is the structural change that takes place during the growth process.  Agriculture is the dominant industry in the early stage of development, but eventually resources are moved to the industrial sector.  In the US between 1900 and 1940, the share of employment in agriculture declined from approximately 40 percent to 20 percent while the share in manufacturing rose from 22 to 27 percent.  Because productivity levels are higher in the industrial sector, the reallocation of resources from agriculture to industry raises overall productivity levels.  Economic growth would thus have been fostered by the process of industrialization and urbanization - the movement of resources off the farms into the cities and factories. 

Krugman (1994) raised many eyebrows when he reported that the Asian miracles could be attributed primarily to extensive growth - the growth in inputs associated with a structural change as workers left the fields and moved to the cities to work in factories.  At a time when the conventional wisdom was we were well on our way to the Asian 21st century, Krugman was raising doubts about the ability of Asia to sustain its growth.  Weitzman (1996) examined the situation in the Soviet Union and concluded the demise of the Soviet Union was attributable to inadequate growth.  According to Weitzman, the early Soviet rulers were able to produce economic growth by the 'forced' build-up of capital and the movement of labor into the factories, but they were unable to get more from their resources and it was this inability to make the transition from extensive to intensive growth that resulted in the slowdown in growth and the uncompetitiveness of the Soviet system. 

This transformation is certainly what we saw in England in the mid 19th century and in the US somewhat later in the century. In fact New England provides one with a wonderful opportunity to see first-hand the changes that accompanied the industrial revolution.   A good place to start would be Plimouth Plantation which provides a view of life in the early seventeenth century.  From there you can move to Mystic, CT or Sturbridge, MA to get a feel for life a century later.  Then it is on to Pawtucket, RI to see the first factory in the US - Slater mill.  Here you can see the first attempt to formalize the production process in what we would call a very small factory.  It is then time to move on to Fall River where you can see the massive structures housing the textile operations that made Fall River one of the world's leading textile centers in the late 19th century. 

As we move forward into the post WW II era, however, the structural changes may have worked to lower productivity growth.  Since 1940, the share of employment in manufacturing fell from 27 to 15 percent while the share in services rose from 13 to 32 percent.  This move to a post-industrial economy would thus tend to lower productivity growth rates since productivity gains tend to be lower in the service sector than the manufacturing sector.  This is one of the factors that makes it to most lists of factors responsible for the slowdown in productivity in the US in the post 1973 period.

Investment and Saving

Workers efficiency will be increased by the use of physical capital - machines.   If an economy is to grow then it must be able to produce more than is needed simply for subsistence and then use some of its 'extra' resources to build factories and buy machinery. Intensive growth, therefore, will be related to the extent of the investment a society makes in its future, and this depends on the level of savings.  This was a point made by Robert Solow in the 1950s as he developed the outlines of the Neoclassical Model of economic growth.  If savings are high, then the pool of funds available to firms making the investment will be large which will drive down the price of those funds.  As we saw earlier, a decrease in the cost of capital will increase the level of investment spending and thus increase the capital base - a process called capital deepening. 

The growth in productivity that comes from capital accumulation is, however, limited due to diminishing marginal product of capital.  The relationship between output and the capital - labor ratio is described in the diagram below. As the size of the capital base grows (move from K1 to K2), output will increase (X1 to X2), but it will increase at a decreasing rate.   Furthermore, if one also assumes capital is mobile and technology is universally accessible, then we should expect to see a convergence in national incomes as the result of the process and spread of economic growth. 

Diagram 5

The result of this approach has been the identification of saving as an important determinant of growth.  This was generally accepted without question until the Asian crises of 1997-98 focused attention on Japan.  Prior to the slowdown, Japan's success was attributed in large part to the ample supply of saving, but after a decade of stagnation, what was emerging was a picture of a nation with too much capital and a system poorly designed to move the capital to support the best ideas.  You also see this in the research of Sala-I-Martin (1997) who finds equipment investment and non equipment investments as significant sources of economic growth. 

Quality of the Labor Force

The level of labor productivity can also increase if there is an increase in the quality of labor.  The investments made in this area would increase human capital.   We have already mentioned some of these investments - language and writing and mathematics.  The ability to keep written records is necessary for the specialization and division of labor that provide the basis for intensive growth.  Imagine keeping even the simple records that are associated with your college bills if there were no accounts, invoices, and agreements. 

It is also true that the increasingly sophisticated scientific analysis requires mathematical sophistication which is at the center of the research into the physical, chemical, and biological processes that were the foundation of the industrial revolution. This is cited as one of the factors responsible for the Asian growth miracles of the last few decades of the 20th century.  In international comparisons of college age students command of science and mathematics, the Asian countries are near the top of the list. 

Technological  Change and Research and Development

The final source of growth is technological change - the discovery of new products and methods of production.  The impact of technological change on output is demonstrated in the diagram below.  Technological change increases the output that is available from any resources which is reflected in the upward shift in the output curve.   With a capital-output ratio of K1, it is now possible to produce X3 units of output.

Diagram 7

Technological change has long been recognized as an important source of economic growth, at least since the pioneering work of Solow and Kuznets.  Solow in 1956 set out the growth accounting framework that divided growth into a component  explained by the growth in inputs (capital and labor) and an unexplainable component - the residual which was productivity growth.  Of the two sources, it was the residual that was by far the most important determinant of economic growth.   And at least in the simplest versions of Solow's model, productivity growth was exogenous and beyond the control of policy makers or the explanation of theorists - what was called "a measure of our ignorance" by Abramovitz (Dougherty and Jorgenson (1996))

In the 1990s there was a considerable amount of effort exerted to reduce the level of our ignorance of the process of productivity growth.  In the New Growth Theory research, technological change is viewed as an endogenous factor and the innovation process, is affected by the nation's structure and policies.  A nation will grow faster, will have faster rates of technological change, if there are incentives to innovate and this focuses attention on those factors that induce innovation. 

According to Romer (1996), new growth theory is based on a new division of the world's inputs.

"New growth theorists now start by dividing the world into two fundamentally different types of productive inputs that can be called "ideas" and "things."  Ideas are nonrival goods that can be stored in a big string.  Things are rival goods with mass (or energy).  With ideas and things, one can explain how economic growth works. Nonrival ideas can be used to rearrange things, for example, when one follows a recipe and transforms noxious olives into tasty and healthful olive oil.  Economic growth arises from the discovery of new recipes and the transformation of things from low to high value configurations. . . .

It emphasizes that ideas are goods that are produced and distributed just as other goods are.  It removes the dead end in neoclassical theory and links microeconomic observations on routines, machine designs, and the like with macroeconomic discussions of technology."

Where then does one look for the sources of comparative advantage in the production of ideas?  Crafts (1996) and Romer (1996) find this perspective sheds considerable light on the growth in the US that eventually eclipsed growth in England.  The key difference, and one beyond the control of any policy official, was the scope of the American market.  The larger size, greater homogeneity, and better transpiration system of the US market meant that the returns to the ideas would be larger there. 

And there are other factors that contribute to differences in the production of ideas.  Romer identifies institutions like the United States Geological Survey, the private university, the large multidivisional firm, and the specialized research laboratory" as also being important.  Crafts (1998) suggests productivity growth depends on technological progress, which in turn results from the profit-motivated allocation of resources to the search for innovations.  This requires that innovators can appropriate returns from their successful searches, which implies that innovation is taking place in an imperfectly competitive environment.  The incentives to innovate in such models are typically increased by larger markets, by improved supplies of human capital, by greater productivity of labor in research, and by reduced fears that rewards will be expropriated by other agents or by government." 

What does the evidence show?  Now we will look at some of the results of research into the causes of economic growth differentials and the slowdown in growth rtes among the developed, high-income countries.  

Why countries grow at different rates

The research of Hall and Jones (1997) supports their hypothesis that "an important part of the explanation [of income differentials] lies in the economic environment in which individuals produce, transact, invent, and accumulate skills.   The infrastructure of an economy is the collection of laws, institutions, and government policies that make up the economic environment.  A successful infrastructure encourages production.  A perverse infrastructure discourages production..."  They conclude that infrastructure, as measured by indexes of variables such as the extent of a people's fluency in an international language, scope of private ownership of the means of production, and openness to trade are important, but "distance from the equator is the single strongest predictor of long-term economic success..."  Sala-I-Martin's (1997) study of economic growth identified regional influences (distance from the equator), political factors (rule of law, political rights, and civil liberties stimulating growth and number of military coups and wars retarding growth).  Location also shows up in the Sachs & Warner (1997) study of growth where they find a nation's location in the tropics, or its landlocked status, reduces the rate of long-term growth.  Sachs and Warner also include as an explanatory variable the Institutional Quality Index that is comprised of measures of bureaucratic quality, rule of law, and corruption.  Easton and Walker (1997) found there is a relationship between "economic growth and the ownership and market-pricing variables" - economic growth tends to be higher in those countries where governments interfere less with the market mechanism and where economic freedom is higher. 

In fact the analysis of the success / lack of success of the transition of the Eastern European and former republics of the Soviet Union looks very much like the more traditional analysis or economic growth.   Selowsky and Martin (1996) find the success at restoring growth was related to "progress in liberalization."   Both economic growth and foreign direct investment was higher in those nations that moved toward liberalization and privatization.  In an effort to explain the differential response of Poland and Russia to liberalization policies, Frye and Scleifer (1996) conducted a survey of retailers in Warsaw and Moscow and found the institutional setting was significantly different in the two cities.  In Moscow the government had a more hands on approach at the same time 'private security' extorted higher payments from Moscow shopkeepers.  Rather than being the helping hand, government was viewed as the grabbing hand.

This infrastructure can be considered to be the preconditions to economic growth, but for long-term sustained growth there are additional requirements.  There is a need to do more than simply get bigger, there is a need to get 'different' and move beyond extensive growth to intensive growth.  If a society is to experience long-term sustained growth, then it would be necessary to see continual increases in labor productivity. 

Why did growth slow and how do we promote faster economic growth?

We have now identified a set of four factors that are associated with economic growth and it should come as no surprise that this is where we begin the search for explanations for the slowdown in growth after 1973 and policies to stimulate growth.   First, however, let's look at the track record to see what has happened to growth in the US since 1973.  In the table below we see that the slowdown was not peculiar to the US with growth rates in the 1973-86 period less than half the rate in the 196073 period. 

Annual Growth Rates