Thursday, July 3, 2014

How much do we really know about what drives GDP growth?

Been reading Diane Coyle's GDP: A Brief but Affectionate History (Princeton University Press, 2014), when -- in my capacity as Mariana's designated 'law and development skeptic' -- I came across this little gem:
[T]he developed economies' national accounts for the most part now use a "chain-weighted" price index in the calculation of real GDP. . . . [But] historic GDP statistics such as those developed by Angus Maddison for the [OECD] have not been recalculated using chain weights.  To do so would change the accepted picture of international growth patterns.  Maddison notes, "Acceptance of the new measure for this period [pre-1950] would involve a major reinterpretation of Amerian history."  It would show U.S. productivity lower than the United Kingdom's in 1914, for example, and much lower U.S. growth and level of GDP than the United Kingdom's by 1929.  This is certainly not the received wisdom among economic historians, which matters because their explanations of what drives growth -- with great relevance for policies now -- could turn out to be based on an inaccurate understanding of what the economy was "really" doing in the ninetheenth and twentieth centuries.  (p. 33-24)
But this is not all gloom and doom for 'development'.  Coyle also notes how many sub-Saharan African countries use the older weighting system, and that:
In each case where old weights have been used for years, there will be a large upward revision in estimated real GDP when the weights are updated.. . . .[O]ne estimate suggests that for twenty years sub-Saharan African economies have been growing three times faster than suggested by the "official" data.
(The 'estimate' she cites to is Alwyn Young, "The African Growth Miracle," NBER Working Paper No. 18490 (October 2012), which is available at 

Of course, these "inaccurate understandings" of "what drives growth" are also of relevance to the law and development community, and to its understandings as to 'what drives growth' as well.

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