Why are growth declines sharp and sudden?

…these econometric studies imply that the decline in growth rates should be gradual, since convergence to high incomes is gradual.  Actual experience, however, rarely displays such a smooth adjustment.  More commonly there is a sharp drop to a new, lower growth rate, as noted above.  In Japan the drop was probably precipitated by the OPEC oil price increases, given Japan’s heavy dependence on imported energy, and by the concurrent worldwide stagflation, particularly in Japan’s major export markets.  In Korea, enormous chaebol-initiated investment projects artificially supported growth for a time but also laid the foundations for the financial crisis that precipitated the sharp decline in growth.

This is one of the most neglected questions in macroeconomics and the theory of economic growth, and these days our understanding of the world, and our fiscal future, may well turn on this matter.  We still don’t have a good sense of why growth fall-offs are so sharp and why they seem so hard to reverse.

In any case that excerpt is from Barry Eichengreen, Dwight H. Perkins, and Khanho Shin, From Miracle to Maturity: The Growth of the Korean Economy.

More generally, I loved reading this book, perhaps all the more because I had just returned from Korea when it arrived.  It is clearly written and full of useful information on virtually every page.  In my opinion every economist should study the Korean growth miracle, as a) it is in some ways mankind’s most impressive and least precedent-backed growth miracle, and b) it overturns or at least challenges many preconceptions about economic growth.  It is perhaps the case where government policy has been most effective in spurring economic growth.  This is now one of the go-to books on that topic.


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