Growth dynamics

What’s the big idea? The standard approach to macroeconomics in the OECD has been to divide the evolution of the aggregate economy into “trend” and “cycle”–fluctuations around that, more or less, stable trend. That structure worked reasonably well empirically for most OECD countries for the “modern” era (post-1870) and especially in the period from after WWII to the 2008 financial crisis.

The big idea of my work on growth dynamics is that the developing countries have almost totally different dynamics. Their growth dynamics are not well described as steady trend with modest business cycle fluctuations, but rather a typical developing country has large shifts in medium-run growth rate (“medium run” is longer than “business cycle of 3-5 years, shorter than “steady state”). Developing country growth is episodic, with, at times, sudden shifts from episodes of very rapid growth to episodes of very negative growth. This volatility in medium-run growth implies that developing world has all of the most rapid episodes of growth (much faster than anything the developed world has ever had) and also has a large number of growth contractions (much) larger than the USA Great Depression.

A correct factual characterization of the growth process is necessary in order to articulate what a “growth theory” is a theory of and intended to explain. There was a big confusion because the “new growth theory” of “endogenous growth” was a theory of “steady state comparative dynamics” and hence, more or less, irrelevant to understanding growth dynamics in developing countries, which needed a theory of the start and stop episodes of growth.

I have done a set of papers (and a book) with a team from the Effective States and Inclusive Development research project: Kunal Sen (now director of UNU-WIDER), Sabyasachi Kar, and Selim Raihan. These have pushed ahead the growth dynamics research.

“Asiaphoria, Meet Regression to the Mean.” 2014. In Prospects for Asia and the Global Economy. (with Lawrence Summers).

Trillions Gained and Lost: Estimating the Magnitude of Growth Episodes.”  Economic Modeling (with Kunal Sen, Sabyasachi Kar, Selim Raihan).

Looking for a Break: Identifying Transitions in Growth Regimes.” 2013. Journal of Macroeconomics. (with Kunal Sen, Sabyasachi Kar, and Selim Raihan).

The Dynamics of Economic Growth: A Visual Handbook of Growth Rates, Regimes, Transitions and Volatility. (Sabyasachi Kar, Lant Pritchett, Selim Raihan, Kunal Sen).

Understanding Patterns of Economic Growth: Searching for Hills Amongst Plateaus, Mountains, and Plains.” World Bank Economic Review, May 2000. This was the earliest paper emphasizing the very different growth dynamics of developing versus developed economies–and that the difference was not that the steepness of the hill (the long-run growth rate) was difference (around which the “convergence/divergence” debate was happening–but that (most) individual developing countries had extended episodes of growth both much faster and much slower than the entire range of growth in the OECD.

Good Policy or Good Luck? Country Growth Performance and Temporary Shocks.Journal of Monetary Economics, vol. 32 no.3, December 1993. (with W. Easterly, M. Kremer, and L. Summers). This is the paper that kicked off the research agenda on growth dynamics as, in the course of trying to understand the results of growth regressions, we realized that part of the problem was that there was very little persistence in growth rates from one period (five year, 10 year, 20 year) to the next so that its growth rate was not a relatively stable “characteristic” of a country (like location, climate, resource endowment, population size) but a “condition” that changed over time. This paper was written 25 years ago but the low degree of growth persistence–low inter-temporal correlations of growth rates–has been a widely replicated, stable fact about the growth process.