A Careful Look at Economic Growth

We are often asked if a particular country is over- or under-performing in economic growth. As one executive told us: “it’s all about macro”.

After carefully defining economic growth, we find that among large countries, China is the superior performer over the past 25 years. The United States and the European Union grow slightly above expectations. Russia and Brazil are under-performers.

In this post we look at the detailed analysis of economic growth and the performance of all countries.

METHODOLOGY

Growth in GDP per capita is not a good measure of economic performance. Old and young members of society can not be expected to generate significant economic output. Thus, if a country is rapidly aging, GDP per capita growth underestimates the true growth. Similarly, if the number of children is growing quickly, then GDP per capita growth again underestimates the true growth.

We instead look at growth in GDP per working-age population (15-64). These are the people at the productive age. A country implicitly chooses if they are in the workforce or are studying, taking care of homes, serving in the military, being unemployed, or other. If those choices are wise, GDP will grow quickly, if not, GDP growth suffers.

With this definition, we first control for affluence. A rich country grows more slowly than a poor country, all other things equal. The graph below shows the relationship.

Scatter Chart

We then control for the dependency ratio. If a country has a high ratio of non-working-age to working-age people–a high dependency ratio–then resources have to be dedicated to caring for these. This should lower GDP growth and this is indeed the case (not shown in a graph, but can be seen in the technical note at the bottom).

GENERATIONAL PERFORMANCE (1990-2015)

With these adjustments, we calculate the “natural” growth rate for each country based on its initial affluence and dependency ratio. We chose a generational perspective (1990-2015) for the analysis. Below is the actual growth less the natural growth for the largest countries.

Economic Performance Stats

Note that we do not expect convergence to the natural growth rate. It is solely used to control for factors outside decision makers’ influence. A country can out-perform its natural growth rate forever if it applies good economic policies, has a superior education system, avoids war, etc.

YEAR-BY-YEAR PERFORMANCE

Finally, we look at the performance of countries in individual years. The interactive graph below shows if a country is over-performing (black) or under-performing (red) in each year, 1990-2015.

CONCLUSIONS

  • Several Asian countries are major over-performers. They include China, Viet Nam, Myanmar, India, and South Korea
  • United States and United Kingdom do well. Japan, Germany, and France are close to their natural growth rates. This may surprise some observers
  • The ultimate under-performer is North Korea. It has grown at less than the natural growth rate in 24 of 25 years. This shows that governance and policy matter
  • There is no evidence that country size influences growth. This may explain why we do not observe country consolidations or breakups. If there were strong economic reasons for this, it surely would happen more often

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Technical note
The dataset covers 213 countries and territories, 1990-2015. The natural growth rate is established with the linear regression: growth = f[ln(gdp/working-age population), dependency ratio]. Countries are weighted by ln(GDP) so that small countries do not dominate the analysis. Standard tests for heteroskedasticity, normality, collinearity are benign. The Stata results are:

Statistics

Source: C-GIDD