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3.2 Long-Term Economic Growth by Country

The world has many countries, and each country has a different pattern of economic level. Tremendous disparities exist among nations in terms of per capita GDP. In Japan and other advanced nations, per capita GDP is at a level of several tens of thousands of dollars, whereas some countries have per capita GDPs of only several hundred dollars. Figures 3.1 and 3.2 show post-World War II changes to per capita GDP by country and region (with purchasing power in 1990 U.S. dollars). We created two categories of per capita GDP as of 2008: developed nations with per capita GDP above $20,000 (the U.S., Singapore, Hong Kong, Japan, Western Europe, and Taiwan), and developing countries with per capita GDP below $10,000 (countries of

Fig. 3.1 Per capita GDP in U.S. dollars (developed countries)

Fig. 3.2 Per capita GDP in U.S. dollars (developing countries) (Source: Angus Maddison's longterm GDP growth statistics)

the former Soviet Union, Eastern Europe, ASEAN countries, Latin American countries, India, and African countries).

Japan caught up with the advanced nations of Western Europe and the U.S. during the post-war era. Japan's per capita GDP surpassed Western Europe's in the mid-1980s, but its growth stalled in the 1990s and it has fallen farther behind the U.S. in the recent years. Meanwhile, per capita GDP in the city-states of Singapore and Hong Kong is rapidly approaching that of the U.S. South Korea, Taiwan, and other new industrial economies (NIEs) experienced growth after the 1980s and have recently been approaching the level of Japan and Western Europe. When we examine the trends in the developing nations (Fig. 3.2), China's recent growth is particularly striking. In the past, the countries of the former Soviet Union (Russia and surrounding nations) and Eastern Europe had stronger economies than Japan; however, the collapse of the Soviet Union in 1991 and subsequent economic chaos brought stagnation and reduced these countries to a level averaging that of the developing nations. However, economic growth in Russia and Eastern Europe has recently surged, and these countries, along with China, appear to be catching up to the developed nations. The Southeast Asian countries of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam have achieved startling economic growth since the 1980s. Although China surpassed them in the 2000s, they are still growing more rapidly than the developed nations. That being said, the countries of Latin America, India, and the countries of Africa face stagnated economic growth, and these economies have remained at a low level of development. Africa, in particular, has been completely left behind in terms of global economic development. India's growth rate picked up in the 2000s, and seems to have taken a step up from its former poverty levels, which are still seen in Africa.

Economic growth theory is a field that researches these types of global economic growth patterns. Economic growth requires growth in the population (i.e., labor force), as well as the accumulation of capital and improvements to technology. Classical economic growth models, such as that of MIT's Robert Solow, explain economic growth as occurring through exogenous technological innovations, population growth, and capital accumulation. As economic development progresses, companies automate their production processes and improvements are made to such infrastructure networks as roads, railways, electric power, and water and sewage systems across the entire nation, thereby increasing the capital stock per capita. Accordingly, economic growth exceeds the rate of population growth. The increased per capita economic growth witnessed to date is due to the worldwide occurrence of this phenomenon.

As capital accumulates, the marginal productivity of capital decreases and the economic growth rate slows. Accordingly, there tends to be a negative relationship between per capita GDP and economic growth rate, and this trend has been confirmed in many studies. The classical model of Solow states that the speed of capital accumulation will ultimately falls below the population growth rate, and economic growth will decelerate to the speed of technological innovation, which is exogenously impacted by the population growth rate. In this basic model, economic growth is determined by levies imposed on the factors of production held by each country, and is not influenced by government policies for deregulation or to create innovation that are so often observed in growth policy roadmaps.

However, recent research focused on economic externalities caused by technology spillover effects, and a new theory has arisen that emphasizes on the importance of innovation on economic growth. This theory of endogenous economic growth focuses on technological innovation, which was treated as exogenous in the Solow model, and treats R&D activities as endogenous. A part of GDP is given over to capital accumulation as equipment investment; likewise, the portion given to R&D spending is allocated to knowledge accumulation. This knowledge (technology stock) is fundamental to such innovations as new products and production process improvements (Grossman and Helpman 1993). Unlike capital stock, knowledge and technology are intangible assets and thus can be shared with others. Through this characteristic of non-rivalry, investment in knowledge stock benefits not only the investors, but the whole of society. Accordingly, policies to promote R&D through subsidies and tax measures can spur the rapid accumulation of knowledge stock and ultimately increase the rate of economic growth. This theory of endogenous economic growth allows for the use of investments in infrastructure as well as in education and other human capital, similar to investments with economic externalities. It is a useful model for evaluating growth strategies.

Robert Barrow and Xavier Sala-i-Martin used economic growth data from 87 countries to conduct a quantitative analysis of long-term economic growth determinants (Barro and Sala-i-Martin 2003). Taking 10-year average economic growth rates (divided into three 10-year periods from 1965 to 1995) as a non-explanatory variable, they ran a multiple regression analysis using per capita GDP for the initial year in each 10-year period, as well as the following variables.

• Variables related to human capital, such as the percentage of male adults who received higher education, infant mortality rates, and birthrates.

• Variables related to the macroeconomic environment, such as ratio of capital investment to GDP, the rate of inflation, and trade indices.

• Variables related to socioeconomic systems, such as the degree of democratization, the effectiveness of courts, and government expenditures as a percentage of GDP.

As can be seen from this theoretical model of economic growth, there is a significant correlation between these explanatory variables and the economic growth rate. We conducted an analysis of whether, in addition to the above variables, regional characteristics lead to differences in economic growth. The results of this analysis clearly show that Japan, China, South Korea, and other countries in East Asia enjoy a higher economic growth rate than elsewhere. Research, including a research project by the World Bank, has been conducted on Asian economic development that demonstrates the influence of investment in human resources and a stable macroeconomic environment (World Bank 1993). However, these variables are already part of the estimation model and, moreover, show that East Asia has high economic growth. In other words, the results suggest a regional characteristic that can, perhaps, be termed an Asia Model that goes beyond economic growth models. Research by MIT's Daron Acemoglu and others shows that economic growth during the colonial era varied according to the colonial power (Acemoglu et al. 2001). Compared with British colonies, colonies controlled by Spain were slow in forming property rights systems governed by the rule of law, and this slowed the development of market economies. The results of this study showed that, in addition to controlling economic variables, those colonies had lower economic growth rates. Thus, when considering international competitiveness (or long-term economic growth), such institutional factors as the historical background and overall socioeconomic circumstances of each country should also be considered, in addition to economic variables that are explained by economic growth theories. We discuss this in greater detail in Chap. 3 by way of a comparison of China and India.

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