Revised Growth Claim

Me in March:

Non-democracies seem more our future than democracies, because while the two groups have the same average economic growth rates, non-democracy rates vary more, and high rates dominate. … Whenever you have a portfolio of items with different (log) growth rates, your portfolio’s long run average return is dominated by the portfolio items with the highest average rates.

William Easterly in May (see also):

The large literature on growth regressions has demonstrated that there is no easy answer to separating out the partial correlation of one particular variable from a long list of other equally plausible variables. The scope for specification searching leads to results that are not credible. The same situation holds here. Indeed, it is not hard with the above variables to produce regressions either showing autocracy to be statistically significant with other controls or statistically insignificant.

His point is valid. So let me revise my claim: Some nations appear to have more variance in general, which manifests itself in more variation in growth, leaders, and forms of governance. What exactly causes this higher variance is unclear, as is how much some kinds of variance encourage other kinds. It makes sense for democracy to reduce policy variance, but we can’t tell how important is that channel relative to other channels.

But whatever causes this variance, the higher variance set of nations should eventually dominate wealth, because peak growth rates dominate wealth. And if having dictators more often continues to be part of that mix, then rich nations will eventually have a lot of dictators among them.

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  • Leo

    If high variance in growth rates also leads to negative growth at some points why should it be dominated by the peak growth rate?

    • Ted

      He means variance in rates among countries, not variance in rates over time. It’s an important distinction. Who’s to say that rates don’t change over time? Even over time scales like 1000 years? High rates will ONLY dominate if the assumptions hold, which is unlikely.

      • Ted

        My last sentence should say ‘High variance’ instead of ‘High rates.’

      • Lord

        Yes, it is much more likely low but positive variance extended over time is more important than erratic instantaneous large variance.

  • Jason

    Has any nation made it from 3rd to 1st world status keeping its economic growth variance?

    I imagine a mechanism where status quo bias and rent seeking on the part of “the bourgeoisie” both stifle innovation and reduce overall economic growth variance. The size of that segment of the population reaches a critical mass during high variance growth periods and suddenly growth saturates to population growth + x% representing the additional network effect of a larger population. The bourgeoisie can retain this power through a democratically legitimate government that allows rent seeking. In a large country, not enough people can personally know those in the dictatorial elite. Access to insiders is a more plentiful resource in a democratic society.

    Also from the perspective of the Bouchaud and Mezard paper:

    Variance is a key component of wealth inequality. The power law exponent in the wealth distribution does not depend on mean growth; it depends on the variance. The higher the variance, the smaller the wealthy elite relative to the population (high wealth inequality).

    • Douglas Knight

      Basically, the only countries to quickly go from 3rd world to 1st world are the East Asian: Japan, Korea, Taiwan, Hong Kong, Singapore. Japan ran into a famous wall. Korea slowed down when it became rich and democratic. The other three are still growing. Singapore, in particular, has a greater gdp per capita than the US. But it’s a city, so that isn’t a reasonable comparison; maybe it will run into a wall when it is a productive as an American city. or not. Taiwan, at 20 million people, is more like a country. And don’t forget the fifth Asian Tiger, Ireland, which has had some problems recently.

      Eastern Europe (eg, Estonia) may be worth looking at in the future, but it’s a bit soon to tell if they’ve slowed down.

      • Jason

        Thanks for the info. Ireland may be a more complicated case as they don’t control their own monetary policy being in the EU. I imagine a US state could grow economically at a very high rate or have high variance without being a dictatorship because of differential policy (e.g. housing in NV or AZ) despite being “1st world”.

        It is possible Hong Kong and Singapore maintain high growth based on similar differential policies; Hong Kong has one of the region’s dominant stock exchanges and Singapore is a major financial center.

        Cutting NYC out of the US politically would seriously reduce US economic growth numbers and the new city-state would probably have a pretty high rate of economic growth based on the financial industry. The same probably would not happen for LA or Houston which are not big financial centers, but that is a guess.

  • “But whatever causes this variance, the higher variance set of nations should eventually dominate wealth”

    Not if the cause of the variance is having a characteristic common in countries that are far from the world’s technology frontier.

  • Yes of course, this set of nations will only dominate wealth if whatever causes their higher variance in persistent growth rates persists even when they get rich.

  • Doug S.

    According to my Econ 101 textbook, poorer nations tend to have higher growth rates than richer ones. When you have very little, it doesn’t take much to double your wealth. Also, it’s easier to do what’s already been done than it is to do something new; in some sense, societies have already learned how to make the kind of transition the United States underwent between 1800 and 1950.

    • Doug S.

      In other words, countries that currently have high growth rates may simply be in the steep part of an S-curve at the moment and will not be able to sustain those growth rates once they become as rich as other countries.

  • Don’t you also have to model the probability of democracies turning into non-democracies (and vice versa) in order to predict what system of government will be more prevalent in the future?

    • Yes, this is a problem for the claim. One of the findings, IIRC, is that the wealthier a nation is (per capita), the less likely any transition from authoritarianism to democracy will ever be reversed. So even if we assume the risk of democratization is exogenous and unvarying, the mix of countries will be continually shifting towards democracy.

      (South Korea comes to mind. Strong military dictatorship which, during the break-neck growth, tipped into a real democracy, and there is no domestic sign it will ever reverse (short of, I dunno, North Korea conquering it).)

  • The sample may be too small, and externalities may make too large of a difference to ever know – which does not actually counter what you said.

    That a middling economy like Nazi Germany could be ramped up enough to threaten the world economic order is probably also a factor in favor of your argument.

  • Patrick L

    Studying ways in which a dictatorship can theoretically pull ahead of a democracy is a high status endeavor. Who are you trying to impress here Hanson?

  • Doesn’t high variance imply a high propensity to move from extremely high growth to extremely low growth and vice versa? So, over a long enough period, shouldn’t variance alone have no impact on mean?

  • AlephNeil

    But this is a fantastically stupid post though isn’t it? Your ‘high variance mystery factor X’ which some nations have and others don’t is just something you’ve made up – it has no grounding in reality.

    You seem to model the ‘dictatorship or democracy’ variable and the ‘economic growth rate’ variable, for each nation, as stationary time series. As if the progress of human history had now ‘settled out’ into a number of equilibria – one for each nation (all evolving independently of each other, of course!) – and all we have to do to understand and prophecy our long term future is to determine the parameters of these time series.

    This is *monumentally* obtuse.