ACCORDING TO Tolstoy, happy families are all similar but unhappy ones are each unhappy in their own way. I'm no expert on families, but this is certainly true of economies. For all the differences between the Anglo-Saxon, Continental and Asian brands of capitalism, the world's rich economies have great similarities in their economic and political make- up, whereas poor countries have a seemingly endless list of unique problems. This makes it tempting to conclude that there is a recipe for economic success, if only everybody would follow it. It's just a question of figuring out the ingredients.
In a wonderful new book called The World Economy: A Millennial Perspective, about to be published by the Development Centre at the Organisation for Economic Co-operation and Development, the economic historian Angus Maddison takes one of the most thorough looks ever at two millennia of economic change.
Economic growth is a recent phenomenon. There was essentially none in the first millennium of our era, with real living standards stagnant and no improvement in life expectancy. From about 1100 to 1820, a process of very slow growth (by modern standards) began, the annual compound growth in real per capita incomes averaging 0.13 per cent a year in what became the advanced capitalist nations and 0.05 per cent a year in today's low and middle-income countries. So there was from the start a gap in performance.
Since 1820, when growth as we know it began, that gap between rich and poor has grown enormous. Between 1820 and 1898, real incomes in the rich countries grew by 1.67 per cent a year, in the poor by 0.95 per cent a year, with the divergence increasing over time. In 1820 the ratio of high to low incomes was two to one; by 1998 it was 19 to one. While there is not such a huge chasm between the life expectancies of the rich and poor, it is bad enough, ranging from 81 in Japan to just 52 in Sub-Saharan Africa.
The book confirms the link between economic growth and the growth of trade and other international transactions. The orthodox wisdom is correct that international trade and investment, with the added ingredient of technical progress, are what boost living standards. Further evidence for this was presented in a new report from the World Bank this week. It found that not only does cross-border investment have a direct effect on economic growth in the recipient countries, but it also has beneficial indirect effects. This is because the effort to attract investors helps improve the institutions and policies of the host countries. Although the report, "Global Development Finance", agrees that emerging market countries also pay a price in terms of greater volatility, as in 1997- 98, it concludes: "International financial flows to developing countries can be more valuable in promoting economic growth and reducing poverty than was commonly thought in the aftermath of the East Asia crisis."
In the grand historical sweep of things, the great leaps forward in growth occurred when one country or another took the lead as a thriving trading power, whether the Venetian Republic in the 11th century or 19th century Britain. …