Which economies are most likely to be shrinking?

by on August 23, 2014 at 8:27 am in Economics, History | Permalink

Not just an economic slowdown, but actual, ongoing consistent negative economic growth.  In my latest NYT column at The Upshot, I argue for some economies it may happen that living standards fall over the course of a few decades:

In 1750, India accounted for one-quarter of the world’s manufacturing output, but by 1900 that was down to 2 percent. The West became more productive as a result of the Industrial Revolution, and India lost much of its leading export sector, textiles. While the data is fragmentary, the best estimates show that India’s living standards declined through the middle of the 19th century and that its economy retrogressed, even as it borrowed some technological improvements from the West. India just didn’t do enough to move toward production on a larger scale or with better machines.

This story of India’s loss to foreign competition is documented in “Deindustrialization in 18th and 19th Century India,” a paper by David Clingingsmith, an economics professor at Case Western Reserve University, and Jeffrey G. Williamson, an emeritus professor of economics at Harvard.

Economists are accustomed to emphasizing the benefits of international trade, and these arguments are largely correct. But in India, internal regulations and underdevelopment, combined with British colonial depredations, prevented Indian resources from being redeployed productively. The lesson is that a sufficiently large international trade shock can lead to decades of economic decline in a major economy, especially if that economy isn’t geared to mounting a flexible response.

As I explain in the piece, the most likely economies to undergo sustained negative growth today are Italy, France, Croatia, Greece, Portugal, and possibly Taiwan.  We should be more optimistic about the United States, but still a similar logic is applying to some parts of our middle class.

Here is my concluding paragraph:

India’s economy started to reindustrialize in the late 19th century, but growth remained subpar until the 1990s — a truly long recovery lag. This may sound strange to say, but when it comes to some parts of the Western world, the Great Depression may offer the cheerier analogy.

Read the whole thing.

1 ummm August 23, 2014 at 8:34 am

As I explain in the piece, the most likely economies to undergo sustained negative growth today are Italy, France, Croatia, Greece, Portugal, and possibly Taiwan.

Europe & Russia are pretty much in a borderline recession. Other countries have high inflation. America is in that sweet spot of tame inflation and steady growth.

America , unlike other countries, will never have a sustained economic decline or a decline in global influence. It’s why we’re exceptional. Thank good fed policy, multinationals, the tireless consumer, Washington for doing a good job during crisis, free market capitalism, the meritocracy ,etc .

2 Ray Lopez August 23, 2014 at 8:35 am

That’s quite a statement by TC, not just declining GDP but declining GDP per capita? Or is TC merely saying declining GDP? A quick read of the article shows it is ambiguous. For example, Japan due to a shrinking population has declining GDP (relative to trend I think), but GDP/capita has increased since the crash of 1990 to about 1.5% a year, which is pretty bad compared to the 60s through 80s but not terrible, as P. Krugman has pointed out. In the case of India, I bet from 1750 to 1900 they had declining GDP per capita but probably, due to increased population, an expanding total GDP.

BTW, the “2%” figure for India is a bit wrong according to my notes.

Industrialization and de-industrialization have been major causes of the divergence in world incomes (Figure 2). In 1750, most of the world’s manufacturing took place in China (33% of the world total) and the Indian subcontinent (25%). Production per person was lower in Asia than in the richer countries of Western Europe, but the differentials were comparatively small. By 1913, the world had been transformed. The Chinese and Indian shares of world manufacturing had dropped to 4% and 1% respectively. The UK, the USA, and Europe accounted for three-quarters of the total. Manufacturing output per head in the UK was 38 times that in China and 58 times that in India.
Allen, Robert C. (2011-09-15). Global Economic History: A Very Short Introduction (Very Short Introductions) (pp. 7-8). Oxford University Press. Kindle Edition.

Such an erudite post…it will cost me being first! Time to hit the Enter button.

3 Brian Donohue August 23, 2014 at 12:25 pm

Hey Ray, when did you dump your Filipina hottie and start dating Krugman’s sister?

Anyway, Japan is an island off the east coast of Asia, as I think Krugman astutely observed.

4 Jan August 23, 2014 at 1:13 pm

You do realize that by always whining about Paul Krugman, you just call attention to him and bump his readership. One gets the impression that you think economics isn’t 50% bullshit and 40% politics. Anyone who doesn’t disagree with Krugman (or truly hate him, as you seem to) isn’t going to convinced by anything you say.

5 Brian Donohue August 23, 2014 at 1:53 pm

I don’t care about any of that. If I thought what I typed on a blog would take Kruggie down or boost him up, I’d be a lunatic.

I’m up a whole level from there Jan- expressing concern for my man Ray who seems intent over the past couple of days to pull the Krugster into the conversation gratuitously and from the most tenuous and improbable angles.

6 Brian Donohue August 23, 2014 at 1:55 pm

MY meta-point,

Japan is a rich and prosperous nation that is doing ok, despite all the hand-wringing. Duh.

7 Bruce Steinback August 27, 2014 at 1:42 am

Um Brian,
Do you realize that your statement here agrees with both Ray and Krugman? Welcome to the team 🙂

8 ThomasH August 23, 2014 at 3:45 pm

It reminds me of the ACC skeptics who can’t post without mentioning Al Gore.

9 Peter Schaeffer August 23, 2014 at 3:52 pm

BD,

It is inappropriate for RL to make reference to his personal life unless it is germane to the topic at hand. It is also inappropriate for you to reference his (RL’s) personal life unless it is germane to the topic at hand.

10 Brian Donohue August 23, 2014 at 7:49 pm

Churlish perhaps, but inappropriate? Compared to some of the shit that flies around here?

On the chance that your feedback is honest and constructive, I will endeavor to check such behavior in the future, but I am bemused at being singled out for inappropriate behavior from you, given how much commentary sympathetic to your view but routinely expressed in such vile and inappropriate terms is countenanced by you without such chastisement.

11 Peter Schaeffer August 24, 2014 at 12:20 am

Brian Donohue,

My commentary was certainly intended to be honest and constructive. Please note that my comments were not directed solely at you.

12 Ray Lopez August 24, 2014 at 12:07 am

@ BD – you seem obsessed with Krugman. And don’t you wish your gf was hot like mine?

The italics in my OP refer to India being 1% of world GDP not 2%, that’s all. Nothing to do with Japan or Krugman.

13 derek August 23, 2014 at 1:11 pm

The problem for a place like Japan is that the shrinking population doesn’t mean shrinking costs. They aren’t closing high speed rail lines or hospitals.

In fact shrinking populations along with increasing cost structures creates an incentive for the next generation to do their economic activity elsewhere.

14 Willitts August 23, 2014 at 2:24 pm

Exactly. Prices will catch up and it will be misinterpreted as deflation.

15 Peter Schaeffer August 23, 2014 at 3:57 pm

d,

The cost of maintaining the rail system is relatively, but not completely fixed (usage impacts maintenance). However, Japan is closing schools and spending less on education. Why would Japan close hospitals? An aging population needs them?

16 derek August 23, 2014 at 4:26 pm

Why? Because the cost money and there isn’t economic growth to pay for them. Japan has had a substantial government deficit for years.

Closing of goals has been a common occurrence in Canada. Something about the cost of government growing faster than the economy can support. In fact a few years ago when the federal Liberals were facing pressure to sort out the waiting lists and extraordinarily poor responsiveness of the health care system they called on an ex provincial premier with impeccable leftist credentials to write a report. When he was premier a notable policy he implemented was to close hospitals.

17 derek August 23, 2014 at 4:27 pm

Closing of hospitals

18 shrikanthk August 23, 2014 at 8:46 am

Well but was India’s GDP per-capita growing rapidly between say 1500 and 1750? Or 1000 and 1500? Or 500 AD and 1000?

Yes, Indian share of World GDP declined between 1750 and 1850. But that’s because the West simply did better! Not because of colonial depradations! India did start growing circa 1850..and did register a real increase in standard of living between 1850 and 1920. The pace may not have been great. But it was still faster than any rate of growth experienced by the country during the zenith of Mughal era or even pre-Islamic India.

This is the sort of populist post that will doubtless draw applause from a lot of Indians who like to berate the West. So yes, it helps in the popularity stakes.

19 shrikanthk August 23, 2014 at 8:56 am

Ofcourse I understand it isn’t Tyler’s intention to critique the Raj in this post. But that’s how the Indian audience will interpret this.

India from 1700 to 1950 was not by any means especially bad. Its growth in this period was the norm for most of human history in most parts of the world. What we need to do is not bemoan India’s lost centuries! But the West’s remarkable escape from Malthusian trap during those very two centuries thanks to some extraordinary supply side innovations. These supply side innovations weren’t an accident, but millennia in the making with all sorts of things contributing to it – the Greco-Roman heritage, Judeo-Christian values, the Protestant reformation, Magna Carta and gradual limitation of monarchy due to centuries of Anglo-Saxon tradition among other things.

20 RR August 23, 2014 at 9:13 am

.The Clingingsmith-Williamson article clearly contends that at least for the first half of the period under question , factors other than British Raj were responsible, so if some one jumps to that conclusion, TC cannot be blamed.

..”But it was still faster than any rate of growth experienced by the country during the zenith of Mughal era …”- Possibly true , but can you substantiate with some Economic History source material and figures?

21 shrikanthk August 23, 2014 at 9:23 am

Well, I remember checking out Maddison’s research which suggests Indian per-capita increased from $450 to $550 between 1000 and 1500 CE. Nothing special. And it remained at around $550 even as late as 1700 and even 1850. It was around $650 at the time of independence as per Maddison. And this increase in per-capita income between 1750 and 1950 was also accompanied by significant population growth. So I suspect we can infer from this atleast tentatively that this growth rate was higher than any growth rate experienced by India over the past 2000 years, until post independence ofcourse when we started doing a LOT better (even in the Nehruvian era – the growth rates of 3% were probably unprecedented in the whole of Indian history!)

22 Ray Lopez August 23, 2014 at 8:57 am

@shrikanthk – think about it shrik–> does *global* inequality matter to the man in the street? If an average Indian knows that his GDP per capita is rising, but not as fast as somebody in another country, does that disturb them? I say not, unless you are a nationalist. Logically, like you, I believe one should only be concerned that your GDP is increasing over time, and perhaps how fast, not that somebody else elsewhere is doing better. But I bet we are in the minority. Most people don’t think this way if they think about it, and there’s a school of economics called http://en.wikipedia.org/wiki/Dependency_theory that says the reason poor countries are poor is that the rich countries prey on them (so indeed global inequality is the cause for poor countries being poor). TC’s post is a blow against Dependency Theory since TC puts the blame on being poor on endogenous factors specific to each poor country.

23 shrikanthk August 23, 2014 at 9:04 am

Ray – Correct. But when we are discussing timeframes that run into centuries, the very idea of a growing economy must be viewed as an abnormality. Because for most of human history, economies haven’t grown. But just remained stable in size.

We spend too much time bemoaning Asia’s lost centuries, and too little time celebrating how remarkable and totally out of the ordinary the West’s escape from the Malthusian trap was!

24 shrikanthk August 23, 2014 at 9:13 am

Ray – Also Angus Maddison’s estimates clearly suggest that the per-capita income of the average Indian in 1950 was higher than in 1850 or even 1750 by about $100 (measured in 1990 dollars) Also the population of the subcontinent increased from roughly 150MM to 350 MM between 1750 and 1950. This does not exactly point to a declining economy. Unless you are comparing with miracles like UK or Holland or Western Europe as a whole which achieved some magical things in those centuries that nobody had ever even dreamt of achieving.

25 Adrian Ratnapala August 23, 2014 at 9:19 am

Some efforts to industrialise in India were stymied by protectionist opposition in Britain. My view is that India is a big place, and if it had not been unified under the British, then some Indian states would have implemented successful policies, much as Japan and Thailand did further east.

26 Steven Flaeck August 23, 2014 at 9:55 am

Doesn’t this sort of imply that India is to blame rather than, uh, the steady dismantling of Indian independence by European powers beginning in, oh, 1505 and increasing continuously with advances in European ship construction?

27 Mesa August 23, 2014 at 11:34 am

Why can’t all these sick economies just perpetually deficit spend to prop up their economies…er…invest in them? We’ll hear from PK about this soon I’m sure.

28 Bruce Steinback August 27, 2014 at 1:56 am

Um, PK has already written about this extensively. They can’t deficit spend because the Northern Europeans are forcing them into austerity, which they can do because they hold the purse strings (the debts that the Southern European countries owe).

If you’re going to lambaste PK, you might try occasionally reading him.

29 Jan August 23, 2014 at 1:29 pm

Tyler’s out-of-nowhere warning about Social Security at the end of the article is interesting. The fix for Social Security, which would only affect about 6 percent of workers, is obvious. Don’t exempt the share of higher earners’ incomes over $117,000 from payroll taxes. People who make low and average incomes pay higher SS taxes than high income earners. I assume this is off the table for Tyler because it raises taxes on the rich (“soak the rich”), but really all it is does is remove a special exemption from certain taxes that everyone already pays.

30 Brian Donohue August 23, 2014 at 2:17 pm

Jan,

Social Security is not welfare- it’s social insurance. There are already subsidies to lower-paid workers built into the benefit formula, and benefits are already ‘means-tested’ inasmuch as benefits are tax free for low income people but 85% taxable for high income people.

The overall tax burden in the USA is pretty damn progressive today, moreso than in most European countries. You are proposing ANOTHER 12.4% increase in marginal tax rates for folks over $117,000. Laughable. And WAAAY more than you need to fix Social Security. A modest bump in the wage base plus phasing in an increase in full retirement age to age 70 and Bob’s your uncle. As a nation, we were able to get something like this done in the 1970s- let’s’ hop to it.

31 Jan August 23, 2014 at 2:33 pm

I like my suggestion better. The general idea is that social insurance can stand to get more progressive as inequality grows, especially if the program’s sustainability depends on it.

I don’t follow the Uncle Bob thing.

32 Brian Donohue August 23, 2014 at 2:41 pm

You are playing into Willits hands here.

Social insurance is a public good. Don’t turn it into welfare.

http://en.m.wikipedia.org/wiki/Bob's_your_uncle

33 Jan August 23, 2014 at 3:36 pm

Gotta do it. 99.5% of the population is sure they’re not rich, certainly not rich enough to pay more in taxes.

34 Cliff August 24, 2014 at 1:07 am

Over $117,000 is not top 0.5% if that is what you think. You are proposing making the U.S. the most progressive tax system in the entire world, by a lot. Adding 12.4% in taxes with absolutely no increase in benefits to the top 3% or whatever is a HUGE change that would inevitably have consequences

35 Jan August 24, 2014 at 8:08 am

Cliff, I mentioned which percent of the population this would apply to. The consequences would be fixing SS. With the 99.5% thing, I am just saying that almost nobody ever acknowledges they can pay more in taxes.

36 Willitts August 23, 2014 at 2:54 pm

Raising the retirement age is a cut in benefits and and a tax increase on current workers. For many like me, it makes an already negative rate of return even worse. Try selling it that way.

We need to stop saving the system and start preserving the promise.

37 Jan August 23, 2014 at 3:33 pm

You’re gonna make it up in Medicare bennies. 😉

BTW I disagree with raising the retirement age. Ain’t no bricklayer gonna make it to 70.

38 Brian Donohue August 23, 2014 at 3:57 pm

Incorrect. Not raising the retirement age is a built-in cost increase as life expectancy increases.

If you’re a Boomer, you would get a hair cut at worst, and it’s your generation that screwed up this country’s finances anyway so boo hoo.

If you’re 25, this amounts to a 20% cut in benefits versus current law. No tax increase. But now it’s on a realistic firm footing. How heavily does a 25 year old discount the current arrangement?

39 Brian Donohue August 23, 2014 at 4:02 pm

Given my druthers, I’d stick it to Boomers harder, but the phase-in reflects a political reality about old people and voting.

40 Jan August 23, 2014 at 7:53 pm

Stick it to boomers. All equally.

41 dearieme August 23, 2014 at 2:18 pm

I suppose the wisdom of that might depend in part on how progressive the whole tax system is. A foreigner might get the impression that the very rich pay a smaller proportion of income as tax than the poor and middling. Do they?

42 Brian Donohue August 23, 2014 at 2:32 pm

Yes yes yes. I spoke to this above.

Look, you know America has trouble doing government. Social Security is a shining exception. It works. It’s worked for 80 years, without growing decayed and mossy. It can work for another 80. Compared to other financial problems the country faces, it is trivially easy to solve.

43 Brian Donohue August 23, 2014 at 2:44 pm

I mean, in answer to your question ‘no no no’. The rich pay most of the tax here.

44 Willitts August 23, 2014 at 2:55 pm

An unsolvent system does not qualify as “working.”

An investment with a negative real rate of return is not “working.”

45 Brian Donohue August 23, 2014 at 2:26 pm

Remember also Jan that Social Security taxes only apply to earned income, so rich people with lots of investment income wouldn’t be affected.

Or do you envision expanding the net here too? This is basically what we did with Medicare (remove cap, apply to passive income).

In which case I’m not sure how much money the new tax regime would raise, because we would surely by on the downslope of Laffer’s napkin.

46 Willitts August 23, 2014 at 2:28 pm

Yes, let’s remove all pretense that SS is a redistribution program. That way the Supreme Court can rule it unconstitutional as it should have done in the first place.

47 Brian Donohue August 23, 2014 at 2:38 pm

Boo!

48 Careless August 23, 2014 at 5:01 pm

How do you think that would work?

49 Jan August 23, 2014 at 2:40 pm

Alternatively, we could retain the exemption for income between $117-$250k and remove it for income in excess of $250k.

50 andrew' August 23, 2014 at 9:19 pm

Why? Because that what makes the retirement insurance work? That makes it not retirement insurance. So, it doesn’t make it work. It is just free money to you.

51 Jan August 24, 2014 at 8:11 am

andrew’, don’t be silly. It’s because that would make it more palatable to many voters by removing them from the tax increase. I think estimates have shown that it could raise almost as much money.

52 Thomas August 25, 2014 at 12:39 pm

It is a good idea because it is ‘palatable to many voters’? That is no argument at all.

53 Peter August 23, 2014 at 2:20 pm

I misread the title as being about “economists” rather than economies, and Alan Greenspan immediately came to mind.

54 Asher August 23, 2014 at 2:38 pm

This point is discussed thoughtfully in Nehru’s autobiography, written in the 1930s from a British prison. He notes that India was a leading manufacturing power in the 18th century but that they did not keep up. He also places the blame both on British predations and on Indians’ lack of inclination to modernize. (For example, he points out that over a period of hundreds of years every self respecting Indian noble had a clock imported from Europe, and that the highly skilled Indian workmen were easily capable of making clocks, yet it seems that it never occurred to the Indians that they should start making their own clocks.)

I read the book over a decade ago, someone correct me if I am being imprecise.

55 Darren Johnson August 23, 2014 at 3:34 pm

India isn’t doing much to promote democracy in the region. #CaseWesternReserve

56 Brian Donohue August 23, 2014 at 3:43 pm

Excellent article Tyler (other than the baffling Social Security curveball at the end.)

Might India’s caste system, which over centuries had developed world-class textiles, simply have been less able to accommodate innovation at the new pace?

The West’s current problem seems more temporary by comparison, although temporary could mean 50 years or so, which is the majority of some people’s lives. I don’t think developing countries have an innovation edge over the West, but mostly a wage edge. As wages in the developing world continue to increase in the years and decades ahead, the West can rebound if it still can innovate, recapture domestic markets, and sell into these newly-rich countries.

57 mulp August 23, 2014 at 4:24 pm

The wage advantage exists only if they are buying from the US which pays in borrowed money from those with too much money to spend or invest in real productive assets and thus pay wages.

In a global economy, the US workers put out of jobs by exports from low wage workers who can not buy what they produce because their wages are too low, can only keep the global economy working by borrow and spend, because they too can not buy what they produce either.

One might try to imagine the 150 million US workers all become innovators who can “create wealth” and thus extract profit from what they produce so the goods sell for more than the wages of the innovators, but the profits that they get as innovators all them to buy the goods they make. But can anyone make money if there are 150 million app developers living off selling the apps they sell and profit from?

The American Dream was built on workers being able to buy for consumption, or for productive capital assets, everything they produced. Making cars without being able to buy a car is not sustainable. Making the components of houses or building houses without earning enough to buy a house is not sustainable.

The economies of Asia built on exports to the West because workers can not afford to buy what they produce means those economies crash when the West is so loaded with debt the West can’t continue buying exports.

Until the West’s wages adjust so the workers in the West can buy what they produce, the global economy will be out of balance. Maybe the price of a new house and new car made in the US needs to fall by 25%, while wages stay constant. That means profits will be eliminated, the stock market will crash, the rich become middle class. After all, I’m old enough to have learned profit indicated economic inefficiency, and the best economy produces no profit.

58 John Cummings August 23, 2014 at 4:20 pm

The only reason the ‘west’ escaped its fate was because of economic empires, a rejection of judeo-christian values under the guise of protestantism via the Sephardic “zen master” John Calvin(Cohen) and the Iberian materialists. They go into Amsterdam during the 17th century and start developing “capitalism”.

It was like the old Italic tribes of old, marching across Eurasia developing global empires before the cult of Christ. This one of materialism. They had the bourgeois state and its ordering of markets, developer of infrastructure, provider of law. With these “tools” in hand. The merchant would develop products from these markets, infrastructure and rule of law. This time however, it was the Germans and Celts who would run the show. It was there time, their destiny. They went to far away lands and slaughtered 100’s of million of people in the name of economic growth, not race like the natives thought.
Basing a society of economic growth is only possible by continuing empires. Just like all the old aristocracies of the past. You cannot escape that fate. Without empire, the quest for economic growth stagnates and collapses. Now Capitalists want to dissolve the National State of the Bourgeois and turn it into a global market state where the Capital Owner sets the rule of law, decides on infrastructure and how markets are set. How quaint. People believe them, because the decline of economic growth empires, the horned beast is quite the deceiver………….

59 Pierre August 23, 2014 at 5:03 pm

“French citizens expect a great deal from their government, and strikes are a common response to reduced wages or benefits.”
http://www.nationmaster.com/country-info/stats/Labor/Strikes
French people go on strike only slightly more often than Americans, and less less often than many many other countries.
Is it too much to expect from a well-known economist more than the usual prejudice against the French?
Is it that hard to check the numbers?

60 Cliff August 24, 2014 at 1:11 am

There’s gotta be something wrong with that link

61 Doug August 23, 2014 at 6:27 pm

Recently visited Taiwan and I think it may already be undergoing the process. Most of Taipei looks old and dilapidated, much closer to Bangkok than Seoul, even though supposedly Taiwanese GDP per capita is higher than Korea. Although official GDP numbers have nearly doubled since 2000, wages have actually decreased since then. Meanwhile property costs have exploded over the same period. A few massive companies, like TSMC, have accumulated profits, a lot of it from offshoring to mainland China. Taiwan has one of the largest foreign currency reserves and savings rates, but unlike the other Asian tigers the formula of that translating into rapid development seems to be broken.

If I had to guess, I’d say the future of Taiwan is going to be China’s Hawaii. A comparatively more laid-back culture, known for its natural beauty, low pollution and quality food. It will lose its international competitiveness in major export markets and instead cater to selling overpriced vacations and retirement options to the mainlanders. Like Hawaii, this will probably be good for property prices and corporate profits, but squeeze real living standards though high day-to-day prices.

62 Bruce Steinback August 27, 2014 at 2:13 am

Late to the show (missed the window on the original article also).

I pretty much agree with many of the commenters. I mean,,Britain’s economic model was to milk the colonies for cheap raw materials, and then sell them the finished products dear. There was no way in Hades they were going to let the colonies get industrialized. Indeed, the US after independence engaged in industrial spying to gain access to the technology.

But what I found fascinating was this paragraph near the end of the article (speaking about the possible effects of stagnation or a decrease in median wages):

“Our Social Security system, whose receipts are based on wage taxation, could then prove to be a bigger fiscal problem than Medicare. Asset prices would most likely prove overvalued, possibly setting off another financial crash or at least damaging many Americans’ retirements. And the rate of household formation would most likely remain slow, depressing the housing market for the foreseeable future.”

Um, this sounds to me like a great explanation of the economic concerns of increasing economic inequality with SS being a new one to me). TC gone over to the other side?!

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