Thursday, January 12, 2023

Some Perspective on Poorer Countries Getting Richer

Economic growth occurs most places, some faster, some slower. 

China has grown a lot over the last 40 years, and it's growth experience has definitely been above average. But it tends to get overrated in the U.S. If you're paying attention, the reason for this is often no deeper than journalists shouting "CHINA!" until you pay attention. 

Do not construe what I just said as minimizing that. It is one of the great events in human history that most people living in China have moved from being poor to (what is called internationally) middle income. And it's notable that China as a whole has moved from about tenth in a ranking of economic size up to second or maybe first (the data from China is not great, so a better economics student should put wide latitude on the official numbers). China will probably even eventually be first before it ends up as second biggest for centuries to come. But a lot of that gets lost ... you know ... because ... "CHINA!!".

But if we want to look for the growth success story, it's next door in South Korea. This was the poorest place on the globe in 1950. And now South Korea is counted amongst developed/rich countries.

Digression: Korea was nominally independent, but dominated by China from the 17th to 19th centuries. Think smaller nation dominated by its neighboring empire as a subject minority (like Ukraine with the Soviet Union). Then in 1895 it got passed to Japan as spoils of war. And in 1945 the Soviets took the good parts (believe it or not) and that became North Korea. The poorer, more agrarian, south became the Republic of Korea (or RoK) ... which everyone calls South Korea. Or increasingly just Korea ... because they'd just assume ignore the presence of North Korea (or DPRK).

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There's a couple of trains of thought about how countries go about the mechanics of growing.

One is that it is based on the investment in and development of domestic sectors that become successful international brands that can compete anywhere. Think Samsung or Hyundai. But there are failures at this too: Brazil has been trying to do this for a century.

The other is that it is based on foreign direct investment (FDI). With FDI, a big foreign investor buys some or all of some firm(s) in the target country and turns them into analogs of the original (this is what AT&T does). Or it might build from the bottom up in a foreign country (this is what Amazon does). Either way, this can work too: we all know that most iPhones and iPads come from a Chinese company named Foxconn, but that Apple is the main reason it's successful. On the other hand, this form a of FDI has encouraged a lot of revolutions and coups over the years.

It's an open debate about which one is better. But what does seem to be true is that the former is associated with more centralized/government planning, while the latter has more decentralized/corporate planning.

And the biggest cheerleaders for government involvement are ... government officials, politicians, bureaucrats and sometimes compliant media. Economists ... not so much ... mostly because corporate types can get fired if their investment plan goes south.

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Both of those involve a lot of focus on exports. That's also something that's overrated, mostly because it's "EXPORTS!!"

Exports are not the secret. It's who you sell the exports to that is.

And if your country is poor, and foreigners are rich, then they may have a great willingness to buy what you've got to offer. (Certainly a lot more interest than the other poor people around you). 

So see, the trick really isn't exporting. Rather it's the old recipe for moving up in the world: if you're poor, find out what the richer people want or need, and start making it and selling it to them.

In this view, exports don't so much cause a country to grow, as they are a signal that the country has gotten that message. Honestly ... I don't think it's that notable if a country gets that message ... what's notable is if they don't (because it's sort of a denial of reality).

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And that brings me to a notable tweet from this past week. Kevin Bryan (a strategic management professor at the University of Toronto noted that:

So, it's tweets, so some clarification is necessary. 

In the first one, it's Bulgaria now to the level the U.S. has now in 30 years (or Thailand or Bosnia into Japan). Of course, the U.S. and Japan will have continued to moved ahead over those 30 years. The point is, if you like the U.S. in 2023, might you be perfectly happy living in Bulgaria in 2053? Maybe so.

In the second, DR is the Dominican Republic, and CV is Cape Verde. Both are island countries in the Atlantic Ocean.

In the third, Chang/Studwell is a paper whose authors have advocated for the government planning approach to growth. In doing so, Bryan is arguing that they're diminishing the stories of countries that have gone a different route.

And the growth noted in the first paragraph is not ridiculous. You can get that by sustaining a growth rate of 3.1%/yr in PPP real GDP per capita (because of the way growth rates work, any deviation around that rate would make the requirement go up a bit). This is not excessive: the U.S. has averaged about 2%/yr growth in real GDP per capita for many decades.

A deeper dive into how two countries have done this is entitled "The Poland/Malaysia Model". You can find it on Noahpinion on Substack (you can read the article without subscribing).

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