Among economists, the countries most famous for rapid economic growth are the East Asian “Gang of Four”: Hong Kong, South Korea, Singapore, and Taiwan. Between 1960 and 2007, incomes in these countries grew on average by more than 5 percent each year. They have been joined recently by China, whose extraordinary economic development has given it annual per capita growth over the same period of 6.2 percent, second only to Botswana, with 6.5 percent. This means that the average income in China was seventeen times larger in 2007 than in 1960.
The success of the East Asian Gang of Four—and now China—has exerted an irresistible lure to researchers of growth. Academic economists who were used to studying whether a politically difficult tax reform might make Americans better off by an amount equivalent to 0.1 percent of US GDP rushed into a field of inquiry that promises to explain how to increase your income seventeen times over. Theoretical breakthroughs in the late 1980s by Paul Romer (now at Stanford) and by Nobel laureate Robert Lucas helped inspire a remarkable effort by economists to find in the empirical data which factors reliably lead to growth. Yet hundreds of research articles later, we wound up at a surprising end point: we don’t know.
In 2003, Arnold Harberger, a free- market economist from the University of Chicago, observed that “there aren’t too many policies that we can say with certainty…affect growth.” A year later, a group of famous economists (including some on the liberal end of the spectrum like Paul Krugman and Joseph Stiglitz) produced something called the Barcelona Development Agenda that announced: “There is no single set of policies that can be guaranteed to ignite sustained growth.” And in 2007, the dean of growth research, Nobel laureate Robert Solow, said: “In real life it is very hard to move the permanent growth rate; and when it happens…the source can be a bit mysterious even after the fact.”
In view of this acknowledged ignorance, how can there still be so many writers who claim to know how to promote growth? The Drunkard’s Walk by Leonard Mlodinow offers a crucial insight. Humans are suckers for finding patterns where none really exist, like seeing the shapes of lions and giraffes in the clouds. It wasn’t that economists had no explanations of what causes growth. On the contrary, we had too many. One survey of the field counted no fewer than 145 separate factors that had been found to be associated with growth. But most of these patterns were spurious, because they failed to hold up when other researchers tried to replicate them. Economists can say something useful about economic success, but we have to clear away a lot of false overconfidence before we get to that point.
In Bad Samaritans, Ha-Joon Chang is both a critic and a purveyor of such overconfidence. He rightly criticizes those who have made overly strong claims for free …
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‘The Anarchy of Success’ November 19, 2009