THE ENDURING ENIGMA OF ECONOMIC GROWTH / PROJECT SYNDICATE

The Enduring Enigma of Economic Growth

Developing countries have made enormous progress in many of the factors behind growth, reflected in stronger institutions, rising education levels, higher life expectancy, and increased investment rates. Yet income convergence with advanced economies has been painfully slow—and in most cases absent.

Andrés Velasco

LONDON—Keir Starmer became the United Kingdom’s prime minister by promising to reignite economic growth. 

Less than two years later, his poll ratings have tanked, and his defenestration is almost a done deal. 

One reason for his political troubles (there are many) is that the British economy never took off.

Politicians like to pretend that they control the levers of economic growth. 

But as Starmer’s plummeting popularity shows, that pretense has worn increasingly thin.

The people who call themselves development economists, by contrast, don’t even pretend to know the root causes of growth. 

A quarter-century ago, they decided that the riddle of why some countries become rich while others stay poor was too tricky to tackle.

If you give villagers a chicken or a pig, will they be less poor two years later? 

If you de-worm children, will they do better in school? 

Those are the kinds of questions that have occupied some of the best minds in the development field. 

As Lant Pritchett, a visiting professor at the London School of Economics, has long argued, it is a massive misallocation of talent.

While some economists dithered, countries and their leaders have been busy trying things out. 

The results are mixed.

In 1978, China’s then-leader Deng Xiaoping launched his policy of “reform and opening up,” resulting in the fastest economic growth in human history. 

Since then, the inflation-adjusted income of the average Chinese citizen has risen by a factor of 20, and hundreds of millions have left poverty behind.

Thirty-five years ago, another demographic giant, India, also embarked on a reform process. 

The results have been less spectacular than China’s, but still impressive: the average Indian enjoys nearly five times the inflation-adjusted income of 1991.

India and China are not alone. 

Other countries—among them Vietnam, Bangladesh, Poland, and Turkey—have grown quickly in recent decades. 

But many more countries have stagnated in the same period.

For example, Brazil and Mexico also stabilized and opened up their economies (Brazil less so than Mexico) in the 1990s, but growth has been anemic. 

China has overtaken both in income per person, even though it started out much, much poorer.

Anecdotal evidence can be made more systematic. 

A recent paper shows that comprehensive policy reforms often precede growth accelerations. 

Yet the overwhelming majority of such reforms do not produce a growth acceleration at all. 

Good policy is necessary. 

It is rarely sufficient.

If that sounds vexing, it should.

But not all is lost. 

Another group of economists—including the Nobel laureate Philippe Aghion—have provided some clues to the mystery of growth. 

The key lies in productivity improvements, which over the long haul result only from technological innovation.

Innovation, in turn, requires what economists call rents: abnormally large profits that more than compensate for innovators’ costs. 

But if the rents are too large, established firms will be tempted to use their economic and political power to stifle innovation by would-be challengers. 

This is a delicate balance that few countries get right.

Businesses in developing countries seldom do the kind of frontier innovation that will yield the next Google or Anthropic. 

For them, the name of the game is to adopt and adapt the technologies invented elsewhere. 

But this task is also proving surprisingly difficult.

Developing countries have made enormous progress in many of the factors behind growth. Education levels have risen. 

Life expectancy has improved. 

Investment rates have increased. 

In many countries, institutions are stronger than they were a generation ago. 

Yet income convergence with advanced economies has been painfully slow—and in most cases absent.

The only plausible explanation for this puzzle lies in the slow diffusion of technology, as Harvard’s Ricardo Hausmann has argued. 

Ideas may cross borders instantly, but productive capabilities do not. 

I can readily download engineering manuals from the internet. 

But reading them does not make me an engineer. 

I cannot be trusted to build a bridge unless I have spent years surrounded by engineers, acquiring and deploying the required know-how.

Moreover, productive capabilities tend to be specific to a single sector. 

And they do not develop unless demand for them arises in the sector. 

Luthiers exist only in countries with a violin industry.

This has implications for policy. 

Markets alone may not generate the capabilities needed for technological upgrading. 

Governments need to coordinate investments, provide sector-specific public goods and sector-specific skills training, and create an environment in which innovation is rewarded without allowing incumbents to block competition.

Resolving the enigma of why some countries grow rich while others stagnate is hard. 

But so is curing cancer. 

That has not kept biologists, research chemists, geneticists, and medical doctors from trying. 

They have made progress, however slow.

Economists have also made progress, and even more slowly. 

But they can keep moving forward as long as they focus on the right issues. 

The challenge, as Pritchett puts it, is to include people “into productivity.” 

The complexity of this challenge can be frustrating. 

But it is less frustrating than continuing to read academic papers about chickens and pigs while billions still live in poverty.

Andrés Velasco, a former finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics.