2 - Prosperity and the Evolving Structure of Advanced Economies

Summary

During the last century and a half economic growth has been formidable in the North Atlantic basin. As shown in Figure 2.1, in 1870 per capita income (in constant dollars of 2000) ranged from around $1,100 in Portugal to about $3,500 in New Zealand and the United Kingdom. By 2007 it had multiplied by about twelve to fourteen times to more than $35,000 in the United States, about $25,000 in France and Germany, and $16,000 in Portugal. Such a shift in income levels implied an average annual growth rate of about 1.8 to 2.0 percent.

Within this explosive secular trend, growth rates exhibited considerable variance over time. OECD countries (defined here following the old membership criteria restricted to Western Europe, North America, Japan, and Australasia) grew at below that average rate before 1914 (at 1.7 percent) and between 1929 and 1939 (at 1.2 percent). By contrast, their growth rates exceeded the historical average right after World War I and especially after World War II. From 1945 to 1960 their growth rate, at 6.6 percent, tripled the average rate, and, although it slowed down in the period 1960–1980, it still more than doubled it, at 4.8 percent. A similar story can be told about Europe as a whole: It underperformed (relative to its historical average) during the belle époque yet it overperformed after the two world wars over the period aptly labeled the Golden Age (Crafts and Toniolo 1996; Toniolo 1998) that ended with the stagflation crisis of the mid-1970s and early 1980s. By the early 2000s, growth rates were around or below 2 percent.

Growth rates also varied substantially across countries. Before 1914, growth took place mainly in the European industrial core and the North American Atlantic seaboard. Then, after the nineteenth-century period of industrial take-off, poor economies grew faster than wealthy ones – in line with the predictions of standard growth models (Solow 1956; Barro 1997). Nonetheless, that long-run process of economic catch-up only narrowed cross-country differences moderately.