In the debate on Wednesday night, Donald Trump compared America’s lackluster economic growth to that of India and China. For the United States, the comparison didn’t look good.
“They're growing at 8 percent,” Trump said of India. “China is growing at 7 percent. And that for them is a catastrophically low number. We are growing -- our last report came out -- and it's right around the 1 percent level. And I think it's going down. ... Look, our country is stagnant.”
Later, Trump pledged that his economic plan would restore America’s growth to much higher levels:
“But we're bringing it from 1 percent up to 4 percent. And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent. And if we do, you don't have to bother asking your question, because we have a tremendous machine. We will have created a tremendous economic machine once again.”
The implication was this: India and China are beating us at a game where we used to excel.
But there’s a simple economic reason that China and India are growing so fast and that America’s growth rate has sunk so low. It’s not our terrible trade deals. It’s that countries at different stages of development have different growth rates. And many poorer countries have been rapidly catching up to rich ones through a fascinating process that economists call convergence.
To understand that, you need to look at the long run of history, which economic historians divide into a few distinct periods. The first encompasses most of recorded history, in which life for the vast majority of people was nasty, brutish and short. Most people worked as subsistence farmers, eking out what they needed to survive, if that.
But around 1700, something interesting started to happen. England pitched into the Industrial Revolution, pulling a few countries in Europe, North America and Oceania with it. These country grew, actually quite modestly, but for a sustained period of time. For the rest of the world, however, life remained nasty and short.
This is what economists call the great divergence. Between 1870 and 1990, the ratio of per capita incomes between the richest and the poorest countries increased by a factor of five, according to economist Lant Pritchett.
As Harvard professor Ricardo Hausmann has written, when the Declaration of Independence was issued in 1776, people in the richest country in the world, probably the Netherlands, were only about four times wealthier than those in the world’s poorest countries. Two centuries later, the average Dutchman was 40 times richer than the average Chinese and 24 times richer than the average Indian.
But since about the 1970s, the world has shifted into a new era. Political, social and technological barriers fell, connecting economies across national borders. And many of the countries at the bottom of the economic heap, including India and China, began growing faster than those at the top.
Economists call this phase convergence, a period of time in which the gap between the West and the rest is collapsing. Today, the average Dutchman is only four times richer than the average Chinese and 11 times richer than the average Indian.
There are a few reasons why this is happening. One powerful one is that some poor countries can now take advantage of new technologies that have been developed in rich countries in the past. They don’t have to innovate to boost their economies; they merely have to take technology that has been developed elsewhere and apply it at home, in what’s called catch-up growth.
In poorer countries that have little in the way of infrastructure, technology and manufacturing, the productivity of workers is relatively low. So introducing just a little outside technology or investment can lead to a big boost in growth. That means some countries have grown as much in the last 50 years as the U.K. and the U.S. did over 400 years. China, for example, has seen its living standards rise eightfold in 30 years — an increase that took the U.S. 122 years and Japan about 80.
But China and India still have a long way to go. Even with their currently rapid rates of growth, they are nowhere near catching up to the U.S. in terms of wealth.
It’s worth remembering that a major reason that countries like India and China are growing so quickly is that they are growing from a very low base. In 2015, per capita GDP in the U.S. was $55,805. In China, it was $7,990. In India, it was only $1,747. In order to achieve 6 percent growth, a worker in the U.S. would have to generate an additional $3,350 of economic activity. In China, each worker would have to come up with $474. In India, it would be only $105.
In fact, it takes 50 years of 7 percent annual growth for a country to raise its per capita income from $500 to $20,000, economist Michael Spence has noted.
For a developed country like the U.S., those levels of growth are almost impossible. The U.S. hasn’t had consistent 4 percent gains since the late 1990s, when it was in the midst of the information technology revolution. The U.S. hasn’t seen growth above 5 percent since the mid-1980s, when central bankers normalized monetary policy following a terrible recession.
Economic growth can come from two sources: how many workers an economy has and how productive they are. Productivity is growing sluggishly in the U.S., and without another technological revolution akin to the invention of the Internet, it seems likely to stay that way.
Meanwhile, America’s population is aging. The U.S. labor force has basically stagnated, and labor force participation is declining. The U.S. could increase growth by having people work more hours, slashing weekends, raising the retirement age, or reviving child labor. It could also drastically increase the number of immigrants it accepts. Economist Giovanni Peri of the University of California has estimated that increasing U.S. economic growth from 2.5 percent to 4 percent without altering productivity would require roughly tripling the flow of legal immigrants coming into the U.S.
At our current level of wealth, the U.S. doesn’t need 6 percent growth. Even slow rates of growth will continue to raise living standards over time. Instead, policy makers should focus on improving quality of life for Americans and making sure economic gains are shared.
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