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The thesis for all modern growth theory is that strong forces exist for convergence in income levels in the “pure” economics of growth, said Robert Lucas, John Dewey Distinguished Service Professor of Economics. “We see these forces in theory among the subset of countries that have a political situation that will let it happen,” Lucas during a Myron Scholes Global Forum cosponsored by the Initiative on Global Markets and Chicago Council on Global Affairs at the Chicago Mercantile Exchange on April 9. “What’s needed is to create and maintain an environment that lets more countries do what some of us have already done.”
In his working paper “Trade and the Diffusion of the Industrial Revolution,” Lucas proposes a model to describe the evolution of real GDPs in the world economy that is intended to apply to all open economies. The paper calibrated the five parameters of the model using the definition of openness proposed by Jeffrey Sachs and Andrew Warner in 1995 and time-series and cross-section data on incomes and other variables from
the 19th and 20th centuries. The model predicts convergence of income levels and growth rates and has strong but reasonable implications for transition dynamics, Lucas argues in the paper.
Some 250 years ago differences in income were very small across countries, he said. Growth rates in the world’s leading economies have remained close to 2 percent per year since the 19th century, Lucas said in his paper. “Over two centuries, this adds up to a more than 40-fold increase in GDP per capita,” he wrote. “Since some countries have remained at or near-Malthusian income levels, this growth has given rise to an enormous and historically unprecedented level of cross-country inequality.”
In construction of the model, Lucas hopes to use the abundant evidence on economies
that have successfully industrialized to learn about the possibilities for poor
economies that have only begun to do so, or those where growth has slowed after
promising beginnings, he said in the paper. Graphing the average annual growth rates of per capita production (real GDP) from 1960 - 2000 against the 1960 per capita GDP levels for 112 countries, Lucas finds a triangular pattern he says is familiar to students of growth.
“The rich countries -- mainly Europe, North America, and Japan -- all have growth rates close to 2 percent,” he wrote. “The poorest countries -- mainly Africa and Asia -- show extreme variety in growth rates, ranging from the miraculous growth of South Korea, Taiwan, Hong Kong, and Singapore to the stagnation and even negative growth of some African and Asian countries.”
Lucas applied the Sachs-Warner classification of open and closed economies to the entire 1960 - 2000 period. “One is struck by the fact that most of the open economies line up on the line that forms the upper edge of the triangle,” he wrote. “I want to develop the idea that this line represents the possibilities for economic growth that were available to any economy over the 1960 - 2000 period under the economic policies that Sachs and Warner summarize in the term ‘openness.’”
Sachs and Warner said that to be classified as open, an economy must pass five tests. It must have elective protection rates less than 40 percent, have quotas on less than 40 percent of imports, have no currency controls or black markets in currency, have no export marketing boards, and not be socialist, Lucas said in his paper.
-by Phil Rockrohr