Modern economic growth

<p><em>Romesh Vaitilingam interviews Daron Acemoglu for Vox<br />
<br />
January 2009<br />
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Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/3145]</em></p>
<p><strong>Romesh Vaitilingam</strong>: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam and today's interview is with Professor Daron Acemoglu of MIT. Daron and I met at the American Economic Association's annual meetings in San Francisco in January 2009, and we talked about his new book Introduction to Modern Economic Growth. I began by asking him why for hundreds of years before the 19th century there has been no growth at all.</p>
<p><strong>Daron Acemoglu:</strong> I think that's a central question that social scientists have been struggling with. I think economics has been largely absent from that table, in the sense that we've been pretty good at developing tools for thinking about modern growth, but not so much about why growth started in the 19th century, took off in the 20th century. And part of what I tried to do in the book is introduce the conceptual framework that economists use, but also then extend it for being able to think about problems like this. And in particular I try to link the proximate causes of economic growth, things like human capital, physical capital, technology, efficiency of production to underlying fundamental causes, institutions that shape incentives, perhaps geographic or cultural characteristics.<br />
And I think if we want to think about why growth took off in the 19th century and why that happened in Western Europe and quickly followed by Western offshoots in the United States, Canada, Australia, New Zealand, I think we really need to kind of link these physical capital technology like factors to underlying features.<br />
And I think a crucial element there is that the 19th century came after major institutional reforms that made the power of kings and monarchs much more limited, so created a much broader atmosphere for economic actions and combined with a number of important technological breakthroughs just kind of unleashed a process of entrepreneurship, creative destruction, entry of new businesses that ultimately led to the take off that we sometimes refer to as the industrial revolution.</p>
<p><strong>Romesh</strong>: OK. So that's really one of the key questions you are addressing in your book, why in the stylised fact, sustained economic growth started in 1800.</p>
<p><strong>Daron</strong>: Yes.</p>
<p><strong>Romesh</strong>: The other big question is of course that happened then, but it hasn't happened everywhere, we see incredibly different rates of growth and sometimes no growth at all?</p>
<p><strong>Daron</strong>: So, I think that's even more pertinent to the current policy debates, in a sense that one puzzle is exactly what you posed, which is why did growth not take place before or more appropriately why sustained growth did not take place before, because we have places like ancient Greece and Rome where there was growth based on sort of capital accumulation for a number of years, but not the sustained growth. But, after sustained growth started taking place in Western Europe, it didn't spread around the world in a manner that we would expect, especially given the fact that the economic opportunities that it offered were just unprecedented.<br />
And my explanation for that is very much linked to the origins of economic growth. In the same way that you needed certain institutional preconditions for growth to take off in Western Europe, we also needed the same kind of preconditions for these available technologies to be spread and adopted and used in different countries.<br />
So, in the United States, those conditions were broadly met in the sense that it had a fairly open political system and no big land owners or existing economic interest that could block the adoption of existing technologies. And what's remarkable in some sense about the United States in the 19th century is that it is a very active bubbling economic environment.<br />
You have people from all walks of life coming into the economic arena with new ideas, new processes. And if you look at the pattern of statistics, you have just a very wide cross section of individuals tinkering with new machines and trying to open their own businesses and all of that.<br />
So, if you compare that to somewhere even closer to the kind of the center of gravity of economic activity during that time in the United Kingdom with somewhere like say Austria-Hungary, you see a very different picture. So Austria-Hungary of course was a very different political system, a very strong monarchy. And the monarchy, actually rather than embracing the new technologies, was very much opposed to it. It didn't want to allow railways; it didn't want manufacturing to spread very much in the Austrian part of the country.<br />
And one reason expressed by the people who are involved in those decisions was that actually the new technologies would be a threat to their existence and here we see again the importance of institutional political economy factors. They were afraid precisely because they thought new technologies would create unrest, would undermine the basis of their political power.<br />
So, therefore, that kind of contrast, although of course it is just a selected contrast I am just using to illustrate a point, kind of shows the importance of these institutional factors. You are starting from an absolutist monarchy with power concentrated in the hands of a monarch and getting his power from large landlords with feudal labor relations. That's not very conducive to the adoption of new technologies, because the new technologies are going to undermine the economic and political rents of the elites, whereas in the United States, you have this more open system and new technologies to spread much more rapidly.</p>
<p><strong>Romesh</strong>: In terms of modern growth, we had this long period I think after the second World War where most of the efforts to grow the underdeveloped countries were unsuccessful. I mean there was a handful, there was Japan, a little bit later there was South Korea, and Hong Kong or so, but it was fairly small scale. In recent years, we've seen massive growth in some huge countries like China and India. Can we take heart from that and think the prospects for the still impoverished parts of the world can attain those rates of growth and can come to reach the levels of development that we have?</p>
<p><strong>Daron</strong>: Yes and no. In the following sense that I think our record in the 1950s and the 1960s was not very bad, in the sense that there were large countries like Brazil that were growing very rapidly and there is South Korea as you mentioned, Japan that was growing very rapidly. So certainly, post war era is not one where the less developing nations have stagnated. The question is that we still don't fully understand what are the dynamics that lead to the start and then stop of these growth processes. And in some sense the big failure during the post war era is that many of those growth episodes did not get sustained. So, South Korea got sustained, but Brazil didn't or Argentina didn't and their growth came to an end, the same thing for Turkey.<br />
And so in some sense, we need to understand what the factors that ultimately limited that growth experience were in order to be able to make better predictions and better policy recommendations about what the future is going to hold. So, in that respect I think the Indian experience is one that's easier for us to understand, because India went through a process of gradual opening of the economy, and the market system was not the major way of allocating resources in India, although it was a market economy in a democracy and that became much more so starting in the late 1980s and the early 1990s. And today, it's showing a very vibrant economy and the democracy is fairly strong in India.<br />
So, you would imagine that on the basis of what we know, the Indian trajectory should not be very different from South Korea. That means it will continue to grow, it will have problems, there are still very big companies that are not as efficiently organized and there is going to be some reallocation pains.<br />
But, for China, we still don't understand exactly what the process that's happened; I mean we know some of the basic outlines. The totally planned economy started giving way more to kind of market signals of township and village enterprises, then kind of state enterprises being privatized, good partnership with foreign companies, export led growth.<br />
But, this has happened all in the context of a political system that still has concentrated power in the hands of the communist party. Of course the communist party is no longer communist in anything but in name. But, certainly power is very well controlled by them and they are using the power both to create stability within the greater Chinese area, but also to kind of direct the growth process for their own benefit.<br />
Now, the question is, what is the future of a growth process like that? Will we run into the problems of the sort that we experienced with Brazil or Turkey where this kind of growth that's being driven by insiders and without political opening will ultimately come to an end? Or, are we going to kind of see a process of reallocation taking place in China despite the political system and perhaps ultimately kind of renewing the political system, changing the political system?<br />
And I think very few people thinking about China really know the details of what's going on within the Chinese political and economic system and I certainly don't. And without knowing those, it's very difficult to kind of know what the future of China is going to hold.<br />
And then the other part of your question is of course, a large number of countries in Sub Saharan Africa, a number of countries in Central America and a few in South Asia, which are now among the poorest countries in the world, they are at the bottom, now that China has taken off, and what's going to happen in those countries.<br />
And I'm very optimistic that these countries have the potential to kind of generate growth. But, I still think that's not something that's going to happen immediately within the next 5 10 years because the political problems are still quite palpable, I mean in Myanmar or Burma, you are not going to have growth take place until there is a peaceful transition to a stable and at least semi democratic government.<br />
In Central America, the conflicts are still ongoing. It is much better time now than it was 20 years ago, but still a more systematic program of investment in education, public goods and bringing the population onboard is necessary. And we are seeing very new things all over Latin America with populous leaders like Morales coming to power.<br />
And then the question is where is this going to lead? Is this going to lead back to populist days or is it going to lead to a kind of synthesis like it happened under Lula in Brazil, where we have kind of acts as a away of bringing the vast majority of the population onboard with the growth agenda and taking public goods to them that is so essential both for their standards of living and for them to actually take part in the market economy.<br />
And then of course in Sub Saharan Africa, the situation is entirely different. I mean you really need to kind of get rid of the warlord politics at some level. You need to get rid of people like Al Bashir and Mugabe and perhaps even a new kind of a system for places like Congo, which are just totally lawless and don't create an environment for new technologies or physical capital to kind of find a home in those places.</p>
<p><strong>Romesh</strong>: Daron, can you give us a sense of how far we've come in our understanding of economic growth in the last 25 years? I mean, in the '70s, there wasn't a lot of research going on in economic growth. We had this idea that technological change was exogenous so there wasn't really a way of explaining that in our analysis. There has been a huge amount of progress, hasn't there? But, can you give us your sense of how that worked?</p>
<p><strong>Daron</strong>: Yeah, I think there has been a huge amount of progress, exactly like you said, the solo growth model is just a monumental intellectual achievement, but it was a theoretical tool on our way to going further. But, obviously a lot of policy and a lot of intellectual discussions were based on the solo model and the solo model puts the emphasis on physical capital. Physical capital is of course essential, I mean without having the kind of the machinery around, you are not going to be productive. But, at the end of the day it's not just any machinery, you need the right technologies, you need the complementarity between human capital and the new technologies, new ideas, efficiency of production, all of these things were really left out of the solo growth model.<br />
So, I think what we've seen over the past 25 years has been an improvement both in the theoretical front and in the empirical front in pushing the agenda further and kind of digging deeper. You know what is it that makes some countries able to kind of mobilize their factors and make more out of this physical capital, this machinery? What type of machinery are they introducing? How are they reallocating resources across different production units?<br />
And I mean, it's been quite radical in some sense, but it's also been gradual, in the sense that we've had models like Paul Romer's work, work by Aghion and Howitt that put the foundations of endogenous growth, but what they've done is they have given us a language for thinking of technology evolving endogenously at a very macro level.<br />
And then the next step is people started theoretically and empirically investigating how we can kind of put even more content into this to kind of determine what the micro determinants of it are, what determines where technology is going to go, what's going to shape where the technology is being used efficiently, how capital and resources are going to get reallocated across countries.<br />
And then the final stage has been kind of where we started and going back to the roots of it is that what are the institutional and the more general sociopolitical characteristics of countries that make it possible for these kind of technological forces to be unleashed and reallocation to take place. And I think those we realize now are really very important.<br />
So, in some sense, we now have the mathematical structure and the dynamic models of economic growth that emphasize technology and physical capital, human capital that kind of put the discipline on us and that we kind of realize things like the innovation process is really important, the reallocation of resources across production is really important, and the underlying political economy institutional foundation, that to support this reallocation and innovation process are really important and that's kind of a great platform for us to go forward.</p>
<p><strong>Romesh</strong>: Daron Acemoglu, thank you very much.</p>
<p><strong>Daron</strong>: Thank you.</p>