Brazil on the short end of a 7-1 score
In economic growth and development there are mysteries that get a lot of attention. And then then are deeper mysteries, the puzzling lack of puzzlement over certain facts. Brazil is a country that has always puzzled me a bit. Here’s a recent article from the Economist:
The unemployment rate is low. But with job prospects dimming, consumers, who have pulled the economy along in the past few years, are growing more downbeat. Last month 11.4% were more than 30 days behind on their debt payments, up from 9% a year earlier. Retail sales have flagged.
Sagging confidence poses the biggest threat to President Dilma Rousseff’s chances of a second term in an election this October. In an effort to prevent voters from feeling the pinch, Ms Rousseff has loosened the fiscal reins. In May public spending was 16% higher than a year earlier and revenues 8% lower. As a result Brazil posted its second-worst monthly primary budget deficit (ie, before interest payments) ever. “They are trying to mask the problem until after the election,” says Ms MaurÃcio.
I checked online and it looks like Brazil has averaged 1.5% RGDP growth over the past 3 years. In contrast, RGDP in China has been rising at about 7.5% per year. In per capita terms that’s a roughly 7-1 advantage to China. Ouch. (Sorry to my Brazilian readers for mentioning 7-1, but I just couldn’t resist.) What could explain such a vast difference?
1. Perhaps it’s because Brazil is about 20% to 25% richer, and richer countries tend to grow more slowly. But that would explain only a slight difference. Both are solidly middle income countries, thus the two growth rates should not differ that much.
2. It sure doesn’t seem like “austerity” can explain the slow Brazilian growth. Indeed the article suggests that fiscal policy has been expansionary.
3. The business cycle? Perhaps, but the unemployment rate is described as “low.”
4. Ethnic differences? Possibly, I’ve argued that for cultural reasons North Korea would have a much easier time growing 10% a year for 30 years in a row than Afghanistan or the Congo. (Assuming North Korea adopted capitalism.) But even so, I still have doubts about the ethnic argument. Here’s a comparison of the US and Brazil:
Brazil: 48% white, 43% “pardo”, 7.5% black, 1% Asian, 0.5% Amerindian.
USA: 62% white, 17% hispanic, 13% black, 6% Asian, 2% mixed, 1% Native American
The US has fairly wealthy states like California and Texas where the white population is less than 50%. I’m certainly not saying ethnicity has no role in the wealth differences, but the IMF estimates Brazilian per capita GDP (PPP) at $12,200, compared to $53,100 in the US. That gap seems way too wide to be explained by the ethnic/cultural differences between the US and Brazil. Even black and hispanic Americans have average incomes at least double the level of Brazil.
5. Government policies? Brazil does have a big government, at least for a developing country. Government spending is 39% of GDP, which is considerably higher than other Latin American countries. As a libertarian I’d like to pin all the blame on that data point, but of course many of those other Latin American countries with “small government” are also quite poor.
6. If not size, then perhaps quality of government? The Heritage ranking of economic freedom puts Brazil only 114th in the world, which is below average. But China is #137, which is even further below average.
7. The one thing that really stands out with government is that Brazil spends lots of money on pensions and not much on infrastructure. And China spends LOTS of money on infrastructure, and spends it reasonably efficiently. (China does build some unneeded infrastructure, but they also build a lot of needed infrastructure, very quickly and at low cost.)
The last item is the one I find most plausible, but even I don’t think it can come close to explaining the 7-1 growth gap between Brazil and China.
And to return to the opening—there’s the deeper mystery of why more people don’t talk about Brazil as a failed state. Why this continual hyping of Brazil as the country of the future? Recall it’s one of the original BRICS. Here’s Bill Clinton in 2012:
Clinton, speaking at a forum of bankers in Sao Paulo, acknowledged some problems but said Brazil still “looks really good” compared to crisis-ridden economies in Europe and the United States.
He said Brazil also compared favourably to India, which is struggling with a stagnant economic reform agenda, and China, which has tensions with some of its neighbours and is at risk of suffering from water scarcity and other depletion of natural resources, he said.
Remember that Brazil is a sophisticated country that has been exporting products like commuter airliners to the US for many years. They have a huge internal market and a fabulous agricultural sector. Waterpower and lots of resources. Modern big cities. We aren’t talking about Lesotho or Laos.
And their per capita income is $12,200 and going nowhere. It’s a mystery to me. And it’s also a mystery as to why they get such a good press. Why aren’t they expected to grow like China? The soft bigotry of low expectations? Is the mental image of Brazil the beach life in Rio, whereas the mental image of China is hard-charging, sharp-elbowed businessmen in Shanghai and Shenzhen? What do you think?
PS. Paul Krugman recently had this to say:
You might be tempted to dismiss this notion as wishful thinking, a sort of liberal equivalent of the right-wing fantasy that cutting taxes on the rich actually increases revenue. In fact, however, there is solid evidence, coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy.
Brazil has tried that approach under the new government (and the previous center-right government as well), and in fairness inequality has fallen somewhat. But I just don’t see the growth payoff.
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12. August 2014 at 09:41
Infrastructure is a serious issue in Brazil. Its not just that they spend more on pensions than infrastructure. They also have terrain that is very difficult to build infrasture on. Harbors that are not great harbors. Mountains to build roads thru. Jungles to build roads thru. Its on of the most expensive places to build infrastructure because of geography.
I guess one could argue other countries have ended up rich with those hardships.
12. August 2014 at 10:09
China has Hong Kong. Brazil has a lot of rural poverty, and policies may be ignoring those areas like education. Seems to me China has made a real effort to reduce its poverty rate during the decade of the 90’s. I also think that China targeted rural poverty.
12. August 2014 at 10:13
Sean is right about infrastructure in Brazil.
In the short-term, everybody’s thinking about the October elections. Everytime there’s a poll showing that Dilma is losing (winning), Petrobras and any company exposed to it rallies (sinks). Investors think Dilma is bad for growth.
12. August 2014 at 10:21
I think it’s this one. Brazil’s got the tax levels of a much richer country, and most of it is being funneled outwards in the form of its incredibly generous pension system and other forms of social spending (keep in mind that poor Brazilians are some of the poorest people in the world). There’s very little public tolerance for higher taxes, and so infrastructure gets stiffed over and over again.
I remember Ruchir Sharma arguing that this was why Brazil had constant issues with inflation running out of control as well*. The combination of high social spending and bad infrastructure/infrastructure spending meant that it was extremely difficult for increases in the money supply to translate into increases in capacity and the provision of goods and services in the economy, meaning any boom was constantly at risk of leaping into inflation.
* I’m probably butchering his argument from Breakout Nations.
12. August 2014 at 10:24
Looks like I beat Lorenzo to this one. There’s a very informative chapter on Brazil in Calomiris and Haber’s ‘Fragile By Design’
http://www.amazon.com/Fragile-Design-Political-Princeton-Economic/dp/0691155240
Oh, as for Krugman, it wasn’t exactly a masterpiece of timing that he defended the DMV at nearly the same time as the USPS announced they lost nearly $2 billion last quarter.
Of course, Mitch Daniels wasn’t running the USPS; ‘When I became governor, the DMV was a place Hoosiers went with a sack lunch and a copy of War and Peace, and hoped they didn’t finish both before their names were called.’
12. August 2014 at 10:31
So, 7.5/1.5=5, not 7. Just sayin’…
12. August 2014 at 10:39
Scott,
The two stories – China and Brazil – might be closely related: http://marketmonetarist.com/2013/07/11/the-pbocs-monetary-supremacy-over-brazil-but-dont-blame-the-chinese/
12. August 2014 at 10:59
Sean, I doubt it’s more difficult to build infrastructure on Brazilian terrain than Chinese terrain, which is even more mountainous.
Matt, I had the opposite impression, that Brazil has done much more to reduce rural poverty (with less success.)
Brett and Patrick, Thanks for the links.
Gabriel, You didn’t read it very closely. The per capita growth rates are actually about 7% and 0.7%, so it’s 10 to 1.
Lars, The problem with the China theory is that Brazil’s problems are clearly supply-side, not demand-side.
12. August 2014 at 11:09
Scott, I totally agree that Brazil’s problems primarily are supply side driven. However, the slowdown in the last 3-4 years in my view very much is a result of monetary tightening (imported from China).
12. August 2014 at 11:28
Brazil’s murder rate is 25 per 100k per year.
A quick wiki suggests that Brazil is the richest country in the world with a murder rate above 15 per 100k per year. (China’s is 1/25th Brazil’s.) Most similarly violent countries are dirt poor, not middle income.
Certainly murder (propensity to commit it and institutional ability to prevent it) must correlate w/ all sorts of GDP relevant factors.
So maybe the puzzle is why Brazil is so rich.
I’d guess it’s because the country is so huge, that despite its disorder/diversity, its got many big, safe pockets in which its brightest can create wealth.
Like California.
*Also interesting is Chile’s 3 per 100k murder rate, 1/8th Brazil’s, despite similar demographics. Chile is obviously well governed- the vanguard of the continent- yet much poorer than Asia’s best governed countries. I just don’t see Brazil’s performance as puzzlingly meager.
12. August 2014 at 11:33
Also, regarding the all these high-level explanations, I’m reminded of greg clark’s observation:
“When I set out in my PhD thesis to try and explain differences in income internationally in 1910 I found that asking simple questions like “Why could Indian textile mills not make much profit even though they were in a free trade association with England which had wages five times as high?” led to completely unexpected conclusions. [That Indian textile workers spent only 15 minutes of every hour working.] You could show that the standard institutional explanation made no sense when you assembled detailed evidence from trade journals, factory reports, and the accounts of observers. Instead it was the puzzling behavior of the workers inside the factories that was the key.”
A guy whose had experience running a factory in both brazil and china might provide a simple answer.
12. August 2014 at 11:40
Scott, in the end Brazil has made decent progress in reducing the poverty rate, but not as much as China.
12. August 2014 at 11:58
Lars, What about the low unemployment rate in Brazil?
Brendan, You said;
“A quick wiki suggests that Brazil is the richest country in the world with a murder rate above 15 per 100k per year. (China’s is 1/25th Brazil’s.) Most similarly violent countries are dirt poor, not middle income.”
Too quick a search—of the countries with a higher murder rate than Brazil, 30% are richer than Brazil. And a bunch more in the 15-25 range also have higher incomes. In all, at least 6 countries with murder rates above 15 are richer than Brazil.
http://en.wikipedia.org/wiki/List_of_countries_by_intentional_homicide_rate_by_decade
I would add that the US had a murder rate far higher than other developed countries in the 1980s (although nowhere near Brazil) and we were the richest country in the world. Sure, murder and poverty are correlated, as are many variables, but I’m not convinced murder rates explain much.
Matt, Yes, but that’s because China grew much faster! I thought your claim was that China had devoted more government resources to poverty reduction. Growth is what we are trying to explain.
12. August 2014 at 12:01
Good point Brendan
Following the world cup here in the uk on the radio – a lot of the journo’s talked about how poor service is – how you’d wait ages to get seated and served and how you hunt thru dozens of shops to find simple stuff, how the hotels were um different – but also how the locals are obviously entirely relaxed about this kind of manana attitude. I think they had one of those phrases like, you know “That’s just the Brazilian way” or something. Cause or effect?
12. August 2014 at 12:18
Hello Scott,
We have in Brazil two different groups of economist those that follow the liberal tradition and those that follows an heterodox tradition. This heterodox tradition comes mainly from the ideas from Prebisch and Furtado. The heterodox views were implemented by the government from the 30’s until the late 80’s. From the 90’s until Mr. Mantega assumes, it was implemented mainly an orthodox view.
Mantega forced in 2010 an strong interest rate reduction. This increased the inflation. To correct this, he started to use the state companies to control prices. He fixed the energy and gasoline prices. There were some pressure even from the labor party, but they didn’t want to assume their mistake.
We have this problem of bad macro management. But in the long term people in Brazil talk about : institutional chaos, low investment, closed economy, exchange rate and on.
12. August 2014 at 12:31
I know that you don’t make the numbers…
But Ireland had the lowest homicide rate in the world in the late 1970s at the height of “the troubles.” And it doubled once peace was achieved?
12. August 2014 at 12:33
Scott – China has had more efficient targeted rural programs some decades ago. Brazil has not, despite Brazil’s Government expenditures at a higher % of GDP than China. Only recently, compared to China, has Brazil better targeted programs like Bolsa Familia which I think launched in 2011.
Funny part is that Brazil is resource rich compared to China. So yes I think growth is a part of the picture, but maybe the Chinese are more effective at executing programs, and started longer ago.
12. August 2014 at 12:38
Sorry above comment at 12:33 Brazil has recently implemented better targeted programs in their country than in the past – not that their programs are better targeted than China.
12. August 2014 at 14:14
Which country is full of “Tiger Moms” and which country is full of “Party Moms”?
All else being equal, which children of those moms would you expect to produce more when they grow up?
It is true that there are definitely Brazilians who were raised (and enabled) to study hard and work hard, and an easy guess is that disproportionately those children who were raised in that manner make up a substantial portion of the higher income side of Brazilian earners and successful entrepreneurs.
China is recovering from Mao’s disastrous policies which dis-enabled Chinese people’s ability/will to produce copiously.
After Mao died, Deng either said “to get rich is glorious”, or allowed himself to be widely misquoted in that manner; it matters little which is true.
Brazil had no similar dramatic switch. Yes there have been reforms, but if you accelerate from 5 mph to 60 mph and someone else accelerates from 55 mph to 70 mph during the same time period, which one has accelerated faster?
12. August 2014 at 15:54
Sao Paulo is not only larger than Los Angeles, it has a higher percentage of European stock as a fraction of the population.
Maybe we can blame the Italians! A lot of Italians migrated to Argentina…
12. August 2014 at 16:18
As a Brazilian, I should say it’s all about policies aimed at intentionally decreasing productivity.
We are one of the most closed economies in the world. This prevents firms from adopting better technologies.
Brazil has a wide range of protectionist policies that requires firms to use national content (i.e., about 60% of your product’s inputs must be locally produced).
This week a major newspaper said that half of the jobs created from 2007 to 2012 were low income (minimum wage) jobs. Most of then wouldn’t be created in an advanced economy.
People can’t invest in infrastructure because the government will change the rules 5 years later. The government literally broke the electricity sector 2 years ago with a pen stroke.
http://www.ft.com/cms/s/0/6010bebe-370b-11e2-893a-00144feabdc0.html#axzz3AE7SRShs
I guess brendan is right, the institutions simply aren’t good enough.
12. August 2014 at 16:45
Off topic, perhaps you’re having some impact here in Australia: http://www.institutional-economics.com/index.php/weblog/wayne_swan_on_monetary_offset_and_the_gfc
12. August 2014 at 17:20
Time for some jokes:
Argentina is a country with a great future behind it, and Brazil is a country with a great future ahead of it — and always will be.
God is creating the world and he is loading Brazil up with lots and lots of natural resources, natural beauty, great beaches and the Archangel Michael protests “God, you are giving them too much” and God replies “wait until you see me create the Brazilian government ..”
Patrick is right, the chapter in Fragile by Design on Brazil is very informative.
There is a sense in which I agree with Krugman, but not that inequality per se is drag on growth (China has massive regional inequalities) but that the sort of government that is enmeshed in certain sorts of inequality is not going to be growth friendly.
Brazil is just an extreme example of “why is Latin America mostly so poor?” After all, many of the great cities of Latin America are a century or more older than the great cities of US/Canada. So, when has Latin America done well in the growth stakes?
When we are talking about infrastructure, it is not just physical infrastructure; it is property rights, judicial systems, regulatory systems. Lots of Brazilians do not have secure property rights, the judicial system is a nightmare, and the Ibero-American permit raj is a lot older and more entrenched than the Indian permit raj. Where much of the point of all the above is entrench social inequality. It is a bit of a wonder they get economic growth at all, but I guess the natural resources carry them somewhat.
And there is someone who worked in Europe and Latin America, his name is Hernando de Soto, author of The Mystery of Capital.
http://www.amazon.com/The-Mystery-Capital-Capitalism-Everywhere/dp/0465016154
He has an Institute.
http://ild.org.pe/index.php/es/
12. August 2014 at 17:37
President Lula said it is due to white, blue eyed devils….(who think they know everything about economics but really know nothing). I think it is the Spanish/Portuguese Catholic culture.
They have never heard the “Greed is Good” sermon.
12. August 2014 at 18:00
I scrounged together some labor statistics, and Brazil’s labor force has been growing at 1.5% versus China at 0.5%. In labor terms Brazil has the advantage. RGDP growth in Brazil is similar to its labor growth, whereas China has RGDP growth an order of magnitude higher than it’s own labor growth.
I think in terms of Solow’s model of Y = f(A, K, L) for long run things. It’s pretty clear that L is not the key here (therefore monetary police is not relevant), and it must be either A (productivity) or K (capital).
According to the World Bank,
http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS
Brazil has a gross savings of 15% of GDP in recent years, versus China with 50%. That definitely explains a lot of it. If Brazil tripled its level of savings and investment, I bet we’d see some improvement.
As Scott points out, Brazil and China rank similarly on economic freedom. Thus I assume that their long-run productivity (A) should be about the same. However, China is poorer, so the same level of economic freedom will help China more than Brazil.
My thesis: China’s superior growth is 70% due to higher investment (Solow’s K), 30% due to being poorer and yet having a similar level of economic freedom (Solow’s A).
I tend to think of Brazil’s stagnation as the default, and China’s growth as the exception.
12. August 2014 at 19:17
Here is the 2009 PISA rankings by OECD – http://www.oecd.org/pisa/46643496.pdf
Brazil is down near the bottom, China is near the top (even if you ignore the Shanghai result as not representative Hong Kong is also high). China is interesting in this list, since it is the one country that has poor institutions and is middle income, despite being high on the list. All the other high ranked countries are rich and have (IMHO) generally good institutions.
This data suggests that either genetically or due to poorer education Brazilians are, taken as a whole, less smart than the Chinese. So maybe China and Brazil have similar poor institutions but Chinese people are better able to overcome the poor institutions. Intelligence matters obviously both in terms of people working together better, longer term investment horizons and less likely to have romantic views as to what can be achieved by governments.
12. August 2014 at 21:50
For those arguing in favor of infrastructure investment as the difference between China and Brazil here is a recent relevant link;
http://ftalphaville.ft.com/2014/08/12/1926162/government-spending-booms-not-so-great-for-long-term-growth/
13. August 2014 at 03:31
On the basis of Joel’s statistics, it is labour growth that is doing the growth and why save and invest if you have to be a member of the elite to get approval for anything and to have secure title for anything much that is productive?
Here is a piece on giving recognised property rights to ex-slaves in Brazil.
http://www.huffingtonpost.com/2014/07/10/brazil-quilombos_n_5572236.html
13. August 2014 at 04:40
Eduardo, Thanks for that info.
happyjuggler, Perhaps, but how do we know whether culture is a cause or reflection of poverty?
Doug, As I recall most of the violence was in N. Ireland, not Ireland itself.
Matt, I simply don’t recall China doing the sort of anti-poverty programs implemented by Brazil (beginning in the 1990s, not 2011.) But perhaps I overlooked something.
Ben, Yes, it’s going to be hard to pin it on the ethnicity of the population, when you look at how rich California is.
Rafael, Very interesting. One possibility is that those Heritage rankings of economic freedom are misleading. It’s possible that China intervenes just as much, but in ways much more consistent with free market forces. That’s an argument I’ve seen for Singapore, which demands that even SOEs compete with private firms without government subsidies.
Thanks Tom.
Lorenzo, Good points, and see my answer to Rafael.
Joel, Investment is part of the story, but of course that also must be explained.
ChrisA, I’m a bit skeptical on education, for two reasons. One, Shanghai is not really representative of China. Second, I tend to think education is endogenous—why is education worse in Brazil? My hunch is that whatever causes the weak performance in education is the same thing that causes the weak performance in other sectors of the economy. So that X factor remains unexplained. And in terms of ethnicity, Brazil isn’t all that different from California.
Everyone. The comments are on why Brazil isn’t doing well, but not the question I found even more puzzling—why is it perceived to be doing well, when clearly it’s doing poorly.
13. August 2014 at 05:22
Is Brazil percieved to be doing well? I don’t think the last three years are very well thought of … Those are the disappointing numbers you gave but the quote provided to show the hype was from 2012. And the current govt is in danger of losing power I think.
Brazil is pereninally percieved to be a potential ‘country of the future’ but it’s unremarkable that each short term failure to achieve would only fan those flames: more low hanging fruit, more good examples to import from abroad, greater catchup gap to the developed world.
And Brazil does genuinely seem to be pursuing some low growth policies out of concerns like not turning the amazon into the Yangtze. Who are we to judge? They are richer than china, they should have a nicer river if they want one.
13. August 2014 at 05:36
“The question I found even more puzzling””why is it perceived to be doing well, when clearly it’s doing poorly”.
Scott, I’m with Nick on this one. The MSCI Brazil (in USD)is precisely flat over the last five years. The markets (and aren’t you supposed to like markets as the compilers of information?) clearly don’t perceive it to be doing well. I think your question should be: “why does Bill Clinton at a forum of bankers in Sao Paulo claim that Brazil is doing well?”. Naturally I’m simplifying a bit but you can see that the question becomes less interesting
13. August 2014 at 07:30
Is anyone else surprised by how much older Mark Carney looks?
13. August 2014 at 07:40
“China Loosens Monetary Conditions in Test of Credit Power”
http://www.bloomberg.com/news/2014-08-10/china-loosens-monetary-conditions-in-test-of-credit-power.html
13. August 2014 at 08:01
Regarding California and Texas, they might not be majority white now but until recently they were. California data from census.gov, and these numbers include “hispanic-white”:
2010 58%
2000 60%
1990 69%
1980 76%
1970 89%
1960 92%
This shows that people of any race, dropped into a high-productivity environment, can be productive. But people of any race dropped into a low-productivity environment can aslo be very productive and out-produce the locals (e.g. Indians in Africa, Japanese in Peru, Chinese everywhere).
The deduction I make from that is simply that immigrants are the most productive people in the world, no matter where they go.
13. August 2014 at 09:19
In China, capitalism is the engine of development. In Brazil, capitalism is the exploitation of man.
As for living under communism, I spent a decent amount of time in Hungary under socialism, and a great deal just as socialism was falling.
People had fun with friends, even under socialism. And they had time. It was all make-shift. Scrounge up some food, find a ride to Lake Balaton. Sleep on the concrete floor with twenty people in a friend’s house. People will try to be human, even under challenging circumstances. But everything was tinged with fear.
13. August 2014 at 09:22
“Brazil: 48% white, 43% “pardo”, 7.5% black, 1% Asian, 0.5% Amerindian.
USA: 62% white, 17% hispanic, 13% black, 6% Asian, 2% mixed, 1% Native American”
Seems like there are some important differences in what is considered to be mixed race. I’m sure much of the US Black, Hispanic and even some of the white population would be considered ‘Pardo’ in Brazil.
13. August 2014 at 09:30
China vs. Brazil? I’d say climate plays a big part.
13. August 2014 at 09:44
NIck, This is not about the Amazon. Very few people live in the western part of China and very few people live in the Amazon. In addition, China has almost 7 times as many people, in roughly the same size country. Brazil doesn’t need the Amazon to develop its country.
Nick and Federico, It isn’t just Clinton, I’ve seen lots of stories about what a wonderful job the Socialist Party did when they took control of Brazil.
TravisV, They’ve gotta keep that 7% growth plugging along.
jj. Yes, immigrants are often more productive.
Steven, That makes sense.
13. August 2014 at 09:49
Racial statistics in South America generally drastically overstate how ‘white’ they are, compared to what genetic tests say. “White” in Brazil might be “Other – Hispanic” or “Mixed race” in the USA. This is true in Brazil, where the ‘whites’ have a far higher percentage of African and Amerindian genes than whites in the USA do.
13. August 2014 at 09:52
“The deduction I make from that is simply that immigrants are the most productive people in the world, no matter where they go.”
Selection bias. That’s like judging the average American by looking at the average American businessperson living in Hong Kong.
13. August 2014 at 09:53
@jj said
“This shows that people of any race, dropped into a high-productivity environment, can be productive. But people of any race dropped into a low-productivity environment can aslo be very productive and out-produce the locals (e.g. Indians in Africa, Japanese in Peru, Chinese everywhere).”
“The deduction I make from that is simply that immigrants are the most productive people in the world, no matter where they go.”
jj: read a bit less bryan caplan, a bit more steve sailer. it’s not necessary that you agree w/ sailer- reality is an acquired taste- but surely you’ll emerge more capable of protecting your chin.
13. August 2014 at 10:02
My own non-expert impression is that China has a pretty decent educational system, esp. considering its national income level. The government takes education pretty seriously and does a pretty good job of enforcing some level of standards even in poor areas. Smart youngsters from poor provincial areas of China have a pretty decent chance of receiving a good education, having a shot at a top school and the possibility of a productive career. Not sure if this is the case in Brazil.
13. August 2014 at 10:56
nate:
Greg Clark observes that even Maoism, the largest most intrusive attempt at changing culture ever, really didn’t budge Chinese culture/character (of individuals). Their bourgeoisness is persistent.
Point is, education is endogenous. Or rather, the odds of some gifted rural kid making it big, depends not just on govt programs, but on the aspirations of that rural kid’s family, too.
As clark puts it, different people respond differently to the same set of incentives.
13. August 2014 at 10:56
I worked as Banker in/with Brazil for twenty years, starting in 92. A few observations.
1) Early 90s much of Brazil problems where huge macro mistakes resulting in what I can best describe as a feral economy.
2) Starting with Cardoso and Real plan, those mistakes were addressed, and for the most part, they have been kept to minimum. The feral economy was taken into a house.
3) Transitioning to more recent times, Micro problems have come to the fore as Macro has decreased. The economy is not entirely house-broken
4) Inequality. It isn’t just about economic inequality, or wealth gap. Its about a huge cultural gap that manifests itself as a high % of the population feeling and being disenfranchised. Think Andean countries, but to a lesser degree. (Imagine if China had a 30% Uyghur population) The house itself isn’t really a well built home.
There isn’t one narrative that fits.
13. August 2014 at 11:22
Is the mental image of Brazil the beach life in Rio, whereas the mental image of China is hard-charging, sharp-elbowed businessmen in Shanghai and Shenzhen?
I wonder a lot about this, though I have no idea how it could be measured and comments like @Chris Arnade’s point to other possibilities.
13. August 2014 at 13:25
Love it how everybody ignores the elephant in the room – Chinese people are, on average, pretty damn smart.
Smarter than the Brazilians. Possibly by a standard deviation.
13. August 2014 at 13:29
Never reason from a price change.
http://img.qz.com/2013/06/commodity-prices-in-brazil.png?w=900&h=1011
13. August 2014 at 13:54
If you want to see chinese growth rates in Brazil, you should look to the years where its industralization took place. Namely, 1930-1980.
Actualy, most of the brazilian problems had their origin during this period. The country experienced the fastest and largest rural migration in history. Cities became big metropolis, like Sao Paulo.
This placed tremendous pressure into public services — education, health care, housing, basic infrastructure. Look at Brazil’s HDI.
The problem is: most of this happened during dictatorships. There were no democratic feedback to correct the dysfunctional aspects that came up. (What makes me imagine how China will look in 20-30 years from now…)
The authoritarian facet of it all also left Brazil with a terrible burden: being the most unequal country in the world.
This is changing due to FHC estabilization programs and Lula’s minimum income policies (not sure where the country stands right now). But if you check the Gini index, Brazil still has subsaharian african levels of inequality.
The reduction of inequality created a mass market in Brazil. You can ask anyone doing business in the country (I mean, selling goods) and they tell you about the rise of the class C: people who could barely afford to buy food all of the sudden became consumers because of the two factors I mentioned before. The country grew in the 2000 thanks to this people. Unfortunately this stalled.
Now Brazil needs to invest in public services and basic infrastructure. That’s the only way out of its conondrum.
I’m writing on a rush, sorry if I don’t post the data here. But you can check them and see if my hypothesis still holds.
13. August 2014 at 14:28
@brendan That’s not Clark’s observation, someone added those brackets to his thinking. As best I could tell from Google he never cited a source for that Indian textile worker claim.
13. August 2014 at 14:40
Brazil’s poor performance isn’t that much of a mystery. Check out Brazil’s PISA scores. See “Brazil’s scary PISA results” (https://www.insidehighered.com/blogs/world-view/brazils-scary-pisa-results). Quote
“In a few words, the results of the PISA are disastrous: Brazil performs below the average in mathematics (ranks between 57 and 60), reading (ranks between 54 and 56) and science (ranks between 57 and 60) among the 65 countries and economies that participated in the assessment.”
By contrast, China is near the top of the PISA tables.
The Economist has more “Weak and wasteful schools hold Brazil back. But at least they are getting less bad.” Quotes
“A decade on, it is clear that the shock was salutary. On December 7th the fourth PISA study was published, and Brazil showed solid gains in all three subjects tested: reading, mathematics and science (see chart 1). The test now involves 65 countries or parts of them. Brazil came 53rd in reading and science. The OECD is sufficiently impressed that it has selected Brazil as a case study of “Encouraging lessons from a large federal system”.”
“One reason the poor learn so little is that a big chunk of school spending is wasted. Since teachers retire on full pay after 25 years for women and 30 for men, up to half of schools’ budgets go on pensions. Except in places such as São Paulo state, which has started to take on the unions, teachers can be absent for 40 of the year’s 200 school-days without having their pay docked. More than a tenth of spending goes on pupils who are repeating grades: an astonishing 15% of those graduating from secondary school are over 25.”
Brazil’s poor economic performance is the predictable result of a low-skill population combined with a very extensive (and deeply self-serving) public sector. China has highly skilled people (at least directionally) and a public sector focused on results (infrastructure, etc.).
13. August 2014 at 14:49
Different opinions on the Brazilian work ethic: http://www.quora.com/Are-Brazilian-workers-lazy
(sorry, might need to have an account to view?)
13. August 2014 at 14:49
“And to return to the opening””there’s the deeper mystery of why more people don’t talk about Brazil as a failed state. Why this continual hyping of Brazil as the country of the future?”
That’s a rather good question. A corollary is why is Mexico’s mediocre economic performance hyped far beyond the reality. The answer or answers aren’t clear. However, recognizing that Brazil (and Mexico) aren’t success stories has clear implications for the diversity obsession that rules much of America and for the implications of Open Borders.
Imagining success stories south of the Rio Grande is a useful palliative versus a sober contemplation of where the U.S. is headed.
13. August 2014 at 14:53
Eons ago someone asked “Why Hasn’t Mexico Done Better With NAFTA”? (roughly). Six factors came to mind. They are listed below. Compare China and Brazil according to each criterion. Taken together the growth delta isn’t any great surprise.
1. Work ethic – Where do you think people (including students) work harder? China or Brazil?
2. Education ethic – Where do you think education is taken more seriously? China or Brazil?
3. Saving – Which country has a higher saving rate? China or Brazil?
4. Entrepreneurship – Which country is more entrepreneurial? China or Brazil?
5. Homogeneity – Which country is more homogeneous? China or Brazil?
6. Family life – Which country has stronger (two-parent) families? China or Brazil?
Folks, this is a trivial comparison and the results should be obvious. A few folks have pointed out a vast gap in crime rates between Brazil and China. Good call. Others have pointed out that China’s government is (vastly) more effective in spending public money. Another good call.
13. August 2014 at 15:00
Rogerio
That is so well said. Thank you
13. August 2014 at 15:22
There is a theory that developing economies that adopt democracy are unstable and bad at developing. That people are able to demand more of their government than it can provide. Non democracies like China can ruthlessly exploit a region (like the 3 gorges dam) and no one can stop it.
I don’t particularly like this theory because it requires many caveats. Why is North Korea so poor? Because it wants to be poor. If it wanted to be rich it could easily adopt policies of growth but juche is more important than growth. I also would like to believe that democracies are inherently superior in terms of growth but I don’t know that it is true.
13. August 2014 at 15:25
It turns out… That Brazilians work much (much) less than other folks in the developing world. See http://www.businessinsider.com/average-annual-hours-worked-for-americans-vs-the-rest-of-the-world-2013-8 for some data on the U.S., Europe, and Asia. See http://research.stlouisfed.org/fred2/series/AVHWPEBRA065NRUG for some data on Brazil.
13. August 2014 at 15:49
As a brasilian citizen, I’d summarize it in 3 points:
Very low savings;
very low work productivity;
Very bad business environment.
13. August 2014 at 17:20
ssumner
Wow, the comment section of this blog, mostly insightful, can really pull in those flirting with racism. “Work ethic” Peter Schaeffer?
13. August 2014 at 18:01
Offhand I’d say the difference between China and Brazil is cultural. In particular, Chinese are culturally oriented toward delaying gratification for future pay-offs. This is evident from their collective behavior:
1. Chinese have higher savings rates than Brazilians. [Of course, part of the difference may be necessitated by the differing perceptions and expectations of their respective social security systems.]
2. They are willing to work hard today for future benefits. This shows up in both their pursuit of educational attainment and on the job. This is the main lesson from their Moms, whether they are Tigers or a milder variety of cat. [Alternatively, one could say they have lower discount rates.]
3. This — deferring gratification — also might explain why, despite pollution and unequal distribution of benefits from economic development, they haven’t explode into open revolt (at least, as yet). They are willing to wait for the pie to get bigger before fighting over how to distribute it. [Compare this with the Indian situation where until quite recently, socialist governments were redistributing the pie before there was any pie to distribute.]
13. August 2014 at 19:29
I agree with João about the three points. In what concerns low savings, it is interesting to explain that during the militar govermenent we had a saving rate of around 23%. After the 1988 constitution, we start to spend a lot with pensions. This raized the governement spends from 25% to around 38% now. This reduced the saving to around 14%. So, the democracy lead to a decrease in the savings.
13. August 2014 at 19:36
Brazil averaged 402 on the 2012 PISA school test scores. That’s about a standard deviation below the OECD average and about 1.4 below Northeast Asia:
http://isteve.blogspot.com/2013/12/graph-of-2012-pisa-scores-for-65_4.html
Brazil has made a fair amount of progress in the 21st Century, which is great, but it’s still a long way from being competitive with the Northeast Asians.
13. August 2014 at 19:46
PISA score are on a scale constructed to look like how the the SAT sections are scored, with 500 as the intended mean and 100 as the intended standard deviation.
Overall, Brazil came in 90 points behind Americans. Brazilians scored 32 points lower on the latest PISA than than African Americans, 63 points below Hispanic Americans, 116 points behind white Americans, and 146 points behind Asian Americans.
I’m sure if you broke out Brazilian scores by race, you’d see a similar pattern, but just offset by 50 to 100 points.
13. August 2014 at 19:49
brendan — is there a term for when somebody misses your point, then makes the same point back at you under the guise of correcting you? Because that’s what you just did and I’m having trouble describing it succinctly. Immigrants clearly do not represent a random sample of their home country.
yeesh.
13. August 2014 at 20:05
Hello Scott, based on your favored consumption measure Brazil is doing better than it appears from GDP stats and China worse, according to data here:
http://data.worldbank.org/indicator/NE.CON.PETC.ZS
Brazil household consumption is 63% of GDP v China only 34%. So the gap in consumption is much higher than the gap in GDP.
The trend in share is not so clear cut but maybe Brazil’s is up/flat v China down/flat, eg Brazil’s average % of the prior 10 years was 60% (so up 2-3% versus that measure) and China 37% (so down 2-3%). So consumption growth is also a little better Brazil v China than GDP growth.
I haven’t seen commentators other than you make the utility = consumption point so often so you could argue it is not directly influencing their thinking. But coming from the other direction eg Michael Pettis argues that recent China investment driven growth is of poor quality and that ends up in a similar place, ie consumption is what really matters. (I’m not sure he believes that high investment share is always bad, but certainly that it is now when it also accompanies sharply rising debt/gdp).
China has been investing a lot these past 10-20 years but started out with very little capital stock, eg almost zero on the chart here in 2000
http://www.economist.com/node/21552555
Perhaps it has now reached the “middle income trap” capital stock levels but hopefully they still have easy catch up potential via consumption growth?
13. August 2014 at 21:22
“I’m a bit skeptical on education, for two reasons. One, Shanghai is not really representative of China. Second, I tend to think education is endogenous””why is education worse in Brazil?”
Sorry, have to disagree with you there.
point#1: Shanghai is not really a representative of China. Of course not, but consist this Shanghai population is over 14 millions, greater than most middle size European countries. If being the financial hub of a country gain advantage, how about we compare Shanghai score with that of of New York city, London or Washington DC? the result will not be pretty, i dare say.
Point#2: Are you arguing with the same logic of “Chicken and the Egg” dilemma? The essential question to me is why China (or East Asia) able to break out of that vicious circle, while Brazil/India stay where they are before despite numerous false dawns. Remember how poor and war torn East Asia was, while India and Brazil basically sat out both World Wars.
14. August 2014 at 00:00
[…] Brasilien verliert auch in der Wirtschaft 7:1 (themoneyillusion.com, Scott Sumner, englisch) Die 7:1-Niederlage gegen Deutschland bei der […]
14. August 2014 at 00:24
Whenever there’s racism to be advanced, you can count on iMoron to show up. And there he is, right on cue.
Yo Steve – it’s not that you’re entirely wrong – because you’re not, occasionally you do manage to raise valid points.
It’s just that you’re a stupid asshole – and you manage to make everyone who takes the implications of evolutionary theory seriously look like a mean-spirited racist.
Also – China’s greatest asset is the Chinese people.
As for the people who claim the problem with Brazil is “culture/education” – isn’t “culture” endogenous ?
14. August 2014 at 02:05
Daniel, Sailer brought information to the discussion, you paid him back with insults. With adversaries like these, I see why this guy is increasingly popular.
14. August 2014 at 04:42
I think people would like to believe that Latin America can be successful, because: 1) They are our neighbors (despite the tensions over US dominance of the western hemisphere). 2) We are increasing looking a lot like them ethnically…and we would like to believe that a multicultural society like Brazil can be successful and have high rates of growth….and 3) they are trading partners that we would like to do more business with and praising them might help us win more…..(of course the NSA has pretty much killed those prospects).
14. August 2014 at 05:12
Everyone, A few general comments:
1. I certainly recognize that throughout much of the world having a higher percentage of people of European descent correlates with higher incomes. That’s very true in South America, with the more European southern tier of South America tending to have the highest incomes. Of course there are also lots of exceptions. Indeed even Sailer notes that Brazil scores unusually low on academic tests even adjusting for ethnicity. I see a puzzle for all of South America. Why do places like Argentina/Chile/Uruguay have lower incomes than Spain, Italy, Australia and Canada? Latin America has low incomes even adjusting for ethnicity. Alternatively, Brazil’s income levels are only slightly higher than South Africa, which is only 9% European and 9% “colored” (I believe that is what Brazilians call “pardo”.) An ethnic “determinist” would predict a much bigger gap between Brazil and South Africa. (The IMF has S. Africa at $11,259, vs. $12,221 from Brazil. So ethnicity is part of the story, but not the whole story. An of course looking at ethnicity just deepens the mystery of why the US is 20% or 30% richer than Western Europe.
2. This brings me to the second point. I think Joao is on the right track in listing multiple factors. Whenever there is a big mystery to be explained, the most plausible explanations are likely to involve multiple factors.
3. When people talk about “education” there are many possible interpretations. For instance, low education could directly make a worker less productive, or it could make for poorly educated voters and inept government. Here’s an analogy. Greek and Sicilian migrants to the US have done very well. That suggests that any “problem” with their culture is not so much that they lack a work ethic, or ability to do business, etc, but that their culture leads to dysfunctional governance. This is probably the perception that led Hayek to praise the Pinochet government, although I think that was a mistake on his part.
4. I certainly accept the notion that there are problems with Brazil’s educational system. Is this the “root problem?” I’m not sure, there’s also inefficiencies in other sectors of the Brazil economy and especially government. Thus the same X factor that leads them to spend more on pensions than infrastructure might lead them to give tenure to bad teachers. But what is that X factor? Saying it’s a lack of education is too simple. The policymakers that make these choices understand what they are doing. Perhaps commenters should have focused more on terms like “social trust” which is certainly correlated with education, but nonetheless a distinct phenomenon.
14. August 2014 at 05:13
Steve,
PISA scores are interesting…but I’ve got to believe there is a lot more to it than that. If the Chinese are so smart why did they live like animals under Mao for 40 years? I say live Free or Die trying to escape….India may be off the chart low…but I have never met anyone in the US from India that was not off the chart smart…if you have a couple billion people the smartest are going to get to Hong Kong, the US, or at least to the coastal cities.
14. August 2014 at 06:17
No, JJ, I didn’t miss your point. You said:
“The deduction I make from that is simply that immigrants are the most productive people in the world, no matter where they go.”
And that’s absurd.
Scott said:
“Alternatively, Brazil’s income levels are only slightly higher than South Africa, which is only 9% European and 9% “colored” (I believe that is what Brazilians call “pardo”.) An ethnic “determinist” would predict a much bigger gap between Brazil and South Africa. (The IMF has S. Africa at $11,259, vs. $12,221 from Brazil.”
Well, an ethnic determinist, which I’m not, might note that the excess of wealth S. Africa enjoys relative to what you’d predict on purely ethnic grounds was built up primarily in the apartheid era. Similar to neighboring Rhodesia.
And of course S. America’s most well governed state was hardly founded on liberal democratic grounds, too.
14. August 2014 at 07:30
I would like to add one more factor to consider. Natural resource endowments. At this point most folks will likely say or think, “Latin America has vast natural resources”. Perhaps that’s true today. However, economic development is a long-term process. So the question could perhaps be phrased as “did Latin America have extensive natural resources in the 19th century when Europe, the United States, and Japan took off?”. Surprisingly the answer to that question is probably no.
The natural resource in question is coal. The UK and the rest of Europe had plenty (the details are complex). The U.S. had the (vast) Great Appalachian Coalfield and the Anthracite fields around Scranton. Japan had substantial coal fields to exploit. By contrast, Latin America has almost no coal.
It’s worth noting that the phrase ‘coal powers’ was frequently used to describe the industrialized nations of the world before WWII. It should also be obvious that coal resources only provide a partial explanation for 19th century economic success. China and India both had large coal resources but did not take off (for various reasons).
The question then is did the presence of coal constitute a necessary, if not sufficient, condition for industrial development? There is some evidence that this might be at least partially true and may account (to some degree) for Latin America’s lagging performance even now.
14. August 2014 at 07:43
Paul,
You’re an idiot.
mikef,
If the Chinese are so smart why did they live like animals under Mao for 40 years? I say live Free or Die trying to escape
Oh look, a keyboard warrior.
Have you ever considered that the Chinese, on average, score differently on the Big Five personality traits than people of Western European descent ?
I have never met anyone in the US from India that was not off the chart smart
Does the term “self-selected sample” mean anything to you ?
Try harder, dumbass.
14. August 2014 at 07:47
OK, maybe you are all are forgetting the words of Jimmy Buffett….”Changes in Latitudes…Changes in Attitudes…”. The sun is like a drug…it is addicting and it zaps your energy. Do you really want to be doing particle physics sweating in 100% humidity when you could be on the beach? If northern Europe worked the entire year like they do in the summer, they would have the income level of Brazil too.
14. August 2014 at 08:15
Chris Arnade,
So quoting from the St. Louis Fed (FRED) on annual hours worked is “flirting with racism”? Really? Are hours worked some new taboo topic that can’t be discussed in polite company? Sort of like women’s ankles in Victorian England?
Please try to add something substantive (based on facts, data, logic, thinking) to these discussions and skip the Ad Hominem attacks, guilt by association games, and crass McCarthyism.
14. August 2014 at 08:45
mikef
China actually made a lot of progress in Mao era: women equality, primary education, land reform and basic infrastructures. In many developmental indexes, such as child malnutrition, basic eduction, literacy and life expectancy, India hadn’t even reach China’s 1979 level. so if you think Chinese lived like animals then, you should pity Indians since they live like animals now after more than 60 years of independence. btw, you should get out more, Indians in US are not exactly the true representative of indian worldwide. Also, where is that Indian enclave that resemble HongKong, Singapore, or TaiWan? Enlighten us.
14. August 2014 at 09:39
Eric,
I would draw a distinction between the Communist Party of China (CPC) and Mao. It is quite true that in the pre-Deng era, China under the CPC made progress in the areas you mention. However, Mao was a disaster. Mao brought China the worst famine in human history (see “Mao’s Great Famine” and the “Great Leap Forward”) along with the tragedy of the Cultural Revolution.
14. August 2014 at 09:41
Peter Schaeffer
My apologies. I was confusing your lighter form of thought with Steve Sailer who plunges right on in.
Hours worked is one thing. Work ethic? Yes culture matters, but when framed in a deterministic way, which I feel your post are flirting with (maybe I am wrong, I haven’t read all your posts carefully) then I worry.
If you are not of that mind set, then my apologies. If, however, you feel it is deterministic, then yes you can have your say, but I will have far less respect for those views. (since I don’t feel they are either correct or helpful)
14. August 2014 at 09:48
For some reason its seems these creepy racial theories tend to come out of the woodwork especially on libertarian-leaning blogs. I wonder if these things connect for many people because racial determinism acts as a kind of moral justification for libertarianism. The implication being that there’s no point in the government trying to provide equality of opportunity, because even if it succeeded in doing that, some groups would still fall behind for innate reasons of inferiority.
14. August 2014 at 09:49
brendan — how is it absurd that the people with the most productive potential (or just desire) self-select as immigrants, and move to where the environment is conducive to making use of their talents? That’s an accepted, uncontroversial hypothesis; I guess it could be wrong, but how is it absurd?
If I understood Brenton correctly, he missed my point and then unwittingly made it for me when he mentioned selection bias. My apologies if I mixed up brendan and Brenton; you posted 1 min. apart and I didn’t notice the different handle. Are you two different people?
Also you haven’t made your point yet, just said I’m being absurd and should read Steve Sailer to acquaint myself with reality. First let me compliment you on your grace and tact. Second, I’m not against reading a new viewpoint, could you link to a relevant article by Sailer?
14. August 2014 at 09:52
O nate
Exactly….
14. August 2014 at 10:36
A fairer American comparison for Brazil than Scott’s comparison to California or Texas would be Puerto Rico, which has higher income than Brazil but much of that is massively subsidized by Congress granting corporate tax breaks to American firms for having some operations in Puerto Rico.
14. August 2014 at 10:47
Steve Sailer,
“massively subsidized by Congress granting corporate tax breaks to American firms for having some operations in Puerto Rico”
Times change. Those tax breaks are largely gone (as of 2006). The loss of the Federal tax advantage was (is) very hard of Puerto Rico. PR had a classical branch plant – tax shelter economy. This approached worked (more or less) for a long time. After 2006, corporate tax shelter – branch plant crowd moved to Asia (and elsewhere).
PR has the worst PISA scores in the USA (by far) and a per-capita GDP very close to Mexico. Note that the raw per-capita GDP of PR is much higher than Mexico. However, the cost of living in Mexico is low and in PR it is quite high. Adjusted for the cost of living, PR and Mexico almost match.
Sadly, PR at this point is a case study in how low PISA scores, a questionable work ethic, and the welfare state produce an economic disaster (right here in the USA).
14. August 2014 at 11:04
1. The whole point is there’s no X Factor. There are a bunch of dysfunctionalities born from Brazil’s rapid and authoritarian growth in the XX century.
2. Anyone that explains Brazil’s GDP’s growth through ethnicity or genetics should be able to explain why the country had the average annual rate of growth of the gross domestic product exceeded 7% between 1950 and 1961, 11,1% between 1968 and 1973 and 7,2% between 1974 and 1980.
3. Re: education — you guys discuss it only focusing on PISA. It should be worth it seeing when Brazil manage to put all of its kids in school and make education truly universal. If you do your homework you’ll see that this only took place in the second half of the nineties.
14. August 2014 at 11:09
As far as an Indian enclave…Go to one of my grad school classes in EE and you will know what I am talking about….
Google “Manjul Bhargava”.
As far as Mao being a great leap forward for China…well yes I may be a keyboard warrior and a dumbass…but the fact that there are people who actually believe that scares the heck out of me.
14. August 2014 at 11:13
jj: Let’s not talk past each other. Yes, self selection is common- emigrants are often more productive than the countrymen they leave behind; Indian-American doctors, etc. Brenton would’ve missed your point, if that was your point- but it wasn’t.
You said (re-read yourself if you don’t believe me) that immigrants, of “any race”, “are the most productive people in the world, no matter where they go.”
–any race–the most productive–if immigrants
That’s crazy. Do I even need to cite income statistics? Mex-American, Afro-European, etc?
A true generalization is that Chinese immigrants are among the most productive people everywhere they go. Jews, too. Afro immigrants the least, etc. (Of course, where self-selection is super strong these generalizations fall apart.)
Your comment was funny because your examples- the Indians do great in Africa, same w/ the Japanese in Peru
!- show that you’ve never even been exposed to folks who disagree with you.
Here’s sailer: http://www.vdare.com/articles/a-few-thoughts-on-iq-and-the-wealth-of-nations
Nate: Yes, libertarians are unusually likely to stumble on psychometrics and genetics because they’re unusually open to non-conventional ideas. However, these “creepy” ideas often make libertarians less ideological, more open to redistribution, higher tax rates, paternalistic regulation, for example.
The only unifying characteristic of the racially aware is absolute disdain for political correctness.
14. August 2014 at 11:18
Sad that Scott seems to be encouraging this sort of thing with his artfully inartful mangling of the cultural/racial connotations of the word “ethnicity” in his post.
14. August 2014 at 12:28
Chris Arnade,
If you have a better measure of “work ethic” than annual hours worked, please post it. Too some extent LFP is an alternative. However, LFP is confounded by job availability and alternative time uses. For example, young women with several children tend to have low LFP. That doesn’t mean that they aren’t working. However, they are not included in the LFP statistics.
Germany and Greece provide cases in point. Greeks work longer hours then Germans on average. However, German LFP (male and female) is considerably higher. Since Greece has one of the lowest birthrates in the world, child care does not account for low female LFP in Greece.
My original comment stands. If you have a better measure or “work ethic”, please post it. Note that I have tried to focus on hard data. For example, China has 5-15 vacation days per year. Brazil has 41 (yes 41, which may be the highest in the world). For some soft data, try typing ‘chinese companies brazil work ethic’ into Google.
14. August 2014 at 12:39
rogerio,
Brazil’s per-capita GDP rose from $1,727 in 1960 to $4,217 in 1980 (more than doubling in 20 years). However, as you point out Brazil wasn’t a democracy in that period. As such the institutions of Brazil didn’t necessarily reflect the culture or values of the Brazilian people. In the 32 years from 1980 to 2012, per-capita GDP rose from $4,217 to $5,721.
Basically, it appears that you are arguing one of two theories. First, Brazil was able to enjoy fast ‘catch-up’ growth until 1980 at which point growth slowed. Second, Brazil has only been able to sustain fast growth in the absence of democracy.
14. August 2014 at 14:31
ChrisA- “Brazil is down near the bottom, China is near the top (even if you ignore the Shanghai result as not representative Hong Kong is also high). China is interesting in this list, since it is the one country that has poor institutions and is middle income, despite being high on the list.”
How is Hong Kong, former British colony and World’s 15th PPP GDP (https://www.cia.gov/library/publications/the-world-factbook/geos/hk.html), representative of China, World’ 121 st PPP GDP (https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html?
14. August 2014 at 17:00
racial determinism acts as a kind of moral justification for libertarianism.
Does not compute. Libertarianism has mostly to do with individual temperament.
there’s no point in the government trying to provide equality of opportunity, because even if it succeeded in doing that, some groups would still fall behind for innate reasons of inferiority.
Even a stopped clock is right twice a day.
“Equality of opportunity” would most definitely lead to some groups falling behind.
Are you offended by that fact that “equality of opportunity” does not magically lead to “equality of outcome” ? I’d like a pink unicorn, too. The fact that the universe hasn’t offered me one is extremely offensive.
Americans have it so good they can afford to be as delusional as they want without paying much of a price.
Funny how human bodies come in all sort of shapes, sizes and abilities. And funny how the distribution of those shapes, sizes and abilities seems to follow racial lines.
But when it comes to brains … suddenly we’re all identical.
And you people have the gall to say you’re pro-science.
14. August 2014 at 17:25
I live in South East Asia and have worked for 2 years in Brazil. While in Brazil, I was always amazed at the abundance of resources and know-how, but the greatest marvel of all was their joie de vivre.
At the end of the day, whatever the economic potential, policies and institutions are driven by core national values, something hard to measure and define, and Brazil’s values are latin. Reducing inequality and providing better access to education will drive growth only up to a point. Music, arts, food, family and football will take precedence over the rest.
This is in contrast to values typically found in Asia: entrepreneurship, education and work.
Making general statements as such is always unfair for individuals, but in the aggregate, the work/life balance is driven by the prevailing values.
I think this explains both the unfulfilled expectations for Brazil and the differences with China.
14. August 2014 at 19:02
o. nate, You said;
“The implication being that there’s no point in the government trying to provide equality of opportunity, because even if it succeeded in doing that, some groups would still fall behind for innate reasons of inferiority.”
This is a real non-sequitor. Or maybe your reasoning just went over my head. But then I’m a utilitarian libertarian, and most libertarians seem to come at the ideology from a different angle.
Brendan, Yes, South Africa and Chile were not democratic during the 1980s, but neither was China.
Everyone, If you told a person from China that test scores from Shanghai or Hong Kong were being used as proxies for the educational level in China as a whole, they’d be rolling on the floor with laughter. It would be roughly like using test scores in Silicon Valley as a proxy for the US.
14. August 2014 at 20:15
o. nate,
“For some reason its seems these creepy racial theories tend to come out of the woodwork especially on libertarian-leaning blogs”
In general, libertarians favor Open Borders and favor a “Blank Slate” interpretation of human nature (or just don’t care about the existence or non-existence of human nature). By contrast, immigration restrictionists tend to believe that human nature is real and is not a “Blank Slate”. Stated differently, you are almost exactly wrong in linking libertarianism and “creepy racial theories”.
What is true, is that libertarian blogs tend to impose less censorship than liberal/left sites. For example, Brad De Long can’t stand any facts that make him look stupid (most facts have that effect). Mark Thoma (EV) is better, but still can’t stand facts (Census data) that deflate his worldview.
Basically conservatives/libertarians are more tolerant of non-PC opinions than liberals. See the hysterical (and factually absurd) Jihad that drove Larry Summers from Harvard for a case in point.
14. August 2014 at 21:07
“Everyone,….. It would be roughly like using test scores in Silicon Valley as a proxy for the US.”
Shanghai clearly is not a representative of China, but the score tell a vastly different story than you portrait.
http://www.telegraph.co.uk/education/10645090/Chinas-poorest-beat-our-best-pupils.html
This story indicated Shanghai students from the lowest socioeconomic strata outscored the children of UK doctors and lawyers. Are these people so highly selected that only the smartest Chinese can work as a janitor in Shanghai? i don’t think so.
14. August 2014 at 21:34
Why do hereditarian putzes insist on comparing PISA scores between countries as if they were proxies for intelligence?
They’re not:
“Comparability of Educational Achievement and Learning Attitudes across Nations
Taht, Karin; Must, Olev
We estimated the invariance of educational achievement (EA) and learning attitudes (LA) measures across nations. A multi-group confirmatory factor analysis was used to estimate the invariance of educational achievement and learning attitudes across 55 nations (Programme for International Student Assessment [PISA] 2006 data, N = 354,203). The constructs had the same meaning (factor loadings) but different scales (intercepts). Our conclusion is that comparisons of the relationships between educational achievement and learning attitudes across countries need to take into consideration two sources of variability: individual differences of students and group differences of educational systems. ***The lack of scalar invariance in EA and LA measures means that the relationships between EA and LA may have a different meaning at the level of nations and at the student level within countries. In other words, as PISA measures are not invariant in scalar sense, the comparisons across countries with nationally aggregated scores are not justified.*** (Contains 2 figures and 5 tables.)”
http://eric.ed.gov/?id=EJ995366
Besides, if you look closely at PISA scores, you find all sorts of bizarre results from a racial determinist perspective, such as Mexico scoring higher than Argentina. When India participated in the PISA several years ago, they finished dead last, even though only two of the more economically developed provinces were tested! If all of the country had been tested, the scores would’ve been even lower.
14. August 2014 at 21:46
Chile is a lot more racially mixed than people often realize:
“Abstract
Background: The geographical distribution of genes plays a key role in genetic epidemiology. The Chilean population has three major stem groups (Native American, European and African). Aim: To estimate the regional rate of American, European and African admixture of the Chilean population. Subjects and Methods: Forty single nucleotide polymorphisms (SNP´s) which exhibit substantially different frequencies between Amerindian populations (ancestry-informative markers or AIM´s), were genotyped in a sample of 923 Chilean participants to estimate individual genetic ancestry. Results: The American, European and African individual average admixture estimates for the 15 Chilean Regions were relatively homogeneous and not statistically different. However, higher American components were found in northern and southern Chile and higher European components were found in central Chile. A negative correlation between African admixture and latitude was observed. On the average, American and European genetic contributions were similar and significantly higher than the African contribution. Weighted mean American, European and African genetic contributions of 44.34% ± 3 9%, 51.85% ± 5.44% and 3.81% ± 0.45%, were estimated. Fifty two percent of subjects harbor African genes. Individuals with Aymara and Mapuche surnames have an American admixture of 58.64% and 68.33%, respectively. Conclusions: Half of the Chilean population harbors African genes. Participants with Aymara and Mapuche surnames had a higher American genetic contribution than the general Chilean population. These results confirm the usefulness of surnames as a frst approximation to determine genetic ancestry.”
http://www.ncbi.nlm.nih.gov/pubmed/25052264
And yet if you look at their PISA scores, they’re about on par with European countries like Romania and Bulgaria. I forgot to mention that Brazil’s PISA scores are also higher than Argentina’s and only slightly lower than Uruguay’s.
14. August 2014 at 21:47
Really, everyone should read this article before talking about intelligence:
http://blogs.scientificamerican.com/beautiful-minds/2013/10/17/the-heritability-of-intelligence-not-what-you-think/
14. August 2014 at 22:02
Although I appreciate the comparison between China and Brazil, I think that if you want to compare apples with apples, you need to compare China with Brazil from the period of Brazilian military dictatorship, when Brazil had the same political/economic model that China has had for the past two to three decades: a highly centralized political power that overrules people’s choices and directs all resources to building infrastructure. During that period, Brazil grew at the same pace as China does today.
The problem with this model is that you suppress economic imbalances only temporarily (by hindering market forces from doing their work), which will eventually catch up. That’s why Brazil had nearly two “lost decades” during the 80s and 90s following the high growth model.
Now, if you want to focus on the modern democratic Brazil, I believe two reasons for slow growth stand out (among many others, naturally):
1.Cultural reason: If you have ever read any news about Brazil, you most likely heard about this aspect of the typical Brazilian character called “Jeitinho”, which I would translate as “dodgy work ethic”. To understand what “jeitinho” really is, read any Walt Disney comic book with the character Jose Carioca.
2.Mentality reason: Outdated left leaning philosophies, such as Marxism, Communism, etc, are still very much alive and strong within the politic. The State is unfriendly to Private Business. Check stats such as “Time required to start a business” from the World Bank, for example.
I believe that the mentality reason permeates all of Latin America.
15. August 2014 at 00:07
I wouldn’t take the sterling Shanghai scores as representative of China. The rumors are that inland run-of-the-mill parts of China that tried out the PISA confidentially did about as well as run-of-the-mill parts of Europe, which would be pretty good. But we’ll see if and when any data is ever released.
The PISA tests can be gamed by not rounding up 15-year-old dropouts. For example, Vietnam debuted with pretty good scores in 2012, but only tested 56% of the number it should have, while, say, Finland tests 96%.
Also the PISA was tried out on a couple of Indian states in 2010 and the scores were very bad, which is why India did not go ahead with its tentative plan to participate as a nation in 2012’s PISA.
15. August 2014 at 00:23
libertarians favor Open Borders and favor a “Blank Slate” interpretation of human nature (or just don’t care about the existence or non-existence of human nature)
I’m not sure about “open borders” (it didn’t seem to go well with the native American/Aborigines, for example), but the “blank slate” theory is pure idiocy.
So is the non-existence of human nature.
If that is indeed what libertarians believe (which I doubt), then they are wrong.
conservatives/libertarians are more tolerant of non-PC opinions than liberals.
“Blank slate” theorizing is about as PC as you can get.
15. August 2014 at 05:28
It’s funny, most of Scott’s readers think Sailer is a creepy, hateful bastard. And Sailer’s (goldbug) readers think Scott is a pointy-headeded hyperinflationist leftist.
In reality, as a long-time reader of both, their written personalities are identical and they’re both as good as it gets.
Unfortunately, Sailer and Sumner are mutually exclusive for most people.
15. August 2014 at 06:32
brendan, what I meant by “immigrants are the most productive people in the world” is that the global population of immigrants is, in aggregate, more productive than the global population of non-immigrants. You interpreted it as “on a global ranking of productivity, immigrants will hold the top positions.” I suppose that’s also a reasonable interpretation so I’m liable for the ambiguity in my writing.
15. August 2014 at 08:33
Daniel,
Since you are responding to my comments, let me offer a few observations. Libertarian thought in the United States is (arguably) represented by Reason magazine, the CATO institute, Marginal Revolution, Bryan Caplan, etc.
As best I can tell, Libertarians all advocate Open Borders. The historically significant exception was Milton Friedman who famously said “You cannot have Open Borders and the welfare state”. Libertarians have been trying to escape that logic for decades, to no avail for obvious reasons.
It really isn’t clear what Libertarians think about the “blank slate”. What is clear is that when anyone uses human nature as an argument against Open Borders, they get quite upset. Basically, Libertarians believe in some sort of tax-free, welfare-state free society where human nature doesn’t matter (or doesn’t matter to them personally).
“I’m not sure about “open borders” (it didn’t seem to go well with the native American/Aborigines, for example), but the “blank slate” theory is pure idiocy.”
The idea that Open Borders is ever (has ever been) a disaster is a thought crime for Libertarians. They are not concerned about the facts, history, etc. For example, Bryan Caplan is adamant about living in a “bubble” (his word) and could care less if the US ends up as “Brazil with Nukes”. Actually, he would welcome it (the inequality part, not the taxes).
“Blank slate” theorizing is completely PC (we agree on this point). However, Libertarians (to their credit) tend to believe more in free speech and don’t censor their blogs to same degree as liberals/leftists. To put this in perspective, Sandra Korn (look her up) isn’t a Libertarian.
15. August 2014 at 08:43
Vladimir, I had assumed Chile was more European than that—interesting.
Eric, You said:
“This story indicated Shanghai students from the lowest socioeconomic strata outscored the children of UK doctors and lawyers. Are these people so highly selected that only the smartest Chinese can work as a janitor in Shanghai? i don’t think so.”
There are two things going on in China, sorting of smarter people into Shanghai, and the fact that Shanghai schools are far better than schools in the countryside.
In addition, low income in Shanghai does not mean janitor, it might mean college professor. My father-in-law was a professor in Beijing and I believe he made $800/year (in the 1990s). One of his daughter’s was a tour guide there and made far more money. The janitors there are all from the countryside, and are not even allowed to send their kids to schools in the city. Don’t assume you can compare Chinese cities to western cities and have any understanding of what is going on in China. The analogies break down in all sorts of ways.
15. August 2014 at 08:47
Peter, Lots of libertarians oppose open borders. I don’t recall Tyler Cowen favoring completely open borders.
15. August 2014 at 09:01
Vladimir,
Do you actually read “Comparability of Educational Achievement and Learning Attitudes across Nations”? I did. It’s a mess. The authors are saying that PISA scores aren’t legitimate (EA) because they don’t uniformly correlate with Learning Attitudes (LA). They (PISA scores) probably don’t correlate with variations in microgravity either. So what?
Only a “Blank Slate” fetishist (and not all of them) would assume a uniform correlation between EA and LA. A partial list of confounding factors includes, number of school days per year, hours per school day, education spending, teacher training and motivation, parental investment in education, TV watching, kindergarten attendance, innate aptitude, homework time, after school learning programs, etc.
This “study” has to be one of the lamest I have seen in a while (which is saying something). Do you really want to rely on an argument that pathetic?
15. August 2014 at 09:49
ssumner,
Tyler Cowen’s does in fact, advocate Open Borders, at least as virtually everyone defines the phrase. See http://marginalrevolution.com/marginalrevolution/2006/06/why_open_border.html (the title is “Why open borders won’t work”). He states that existing land use restrictions (zoning) constitute a sufficient limitation on immigration that no other laws or regulations are needed. Given that he opposes all actual restrictions on immigration he is objectively, an advocate of Open Borders. Let me quote
“Land use restrictions are often a more important “”immigration policy” than border control per se. It is not just how many people get in at what cost, but who can afford to live here. This includes zoning laws, restrictions on the number of people allowed to live in an apartment, policies toward “squatters,” and rules for the homesteading of public property. So by “open borders” I mean also liberal land use policies; nominally open borders would matter far less if unskilled laborers couldn’t also afford to live in the U.S. (Note to anti-immigration types: you are focusing too much on the ease of crossing the border and not enough on the costs of living here. How much the best immigration restrictions involve land use policy or border policy is a curiously underexplored question.)”
and
“That is why I do not favor unlimited immigration. To the extent that nominally “open borders” would be tolerable, it is because we already impose implicit immigration restrictions through land use policies.”
In other words, no actual restrictions on immigration are needed because of zoning. If you oppose all legal restrictions on immigration, then you favor Open Borders. Saying that legal restrictions aren’t needed because we have zoning doesn’t change that.
15. August 2014 at 10:26
Vladimir,
“Why do hereditarian putzes insist on comparing PISA scores between countries as if they were proxies for intelligence?”
Actually the correlation between intelligence and PISA scores is probably rather high although a search online failed to find it.
However, the real point isn’t about intelligence, much less the heritability of intelligence. The substantive point is that PISA scores appear to predict economics performance (absolute per-capita GDP and/or GDP growth) rather well. To use a trivial example (with gigantic consequences), every Chinese speaking entity has great PISA scores. Every Chinese entity (Hong Kong, Singapore, Macau, Taiwan, the PRC) is doing rather well. You have to be willfully blind to miss this stuff.
Is the correlation perfect? Of course, not. North Korea would probably get pretty good PISA scores if they took the test. As you point out, Mexico beats Argentina with PISA but lags behind Argentina economically. The larger point is the correlations don’t have to be perfect to provide insights (and correlation and causation aren’t the same thing).
In the case of Latin America, there is strong evidence that poor education (measured by PISA) explains poor economic performance. See “Schooling, educational achievement, and the Latin American growth puzzle” by Eric A. Hanushek and Ludger Woessmann. The abstract reads.
“Latin American economic development has been perceived as a puzzle. The region has trailed most other world regions over the past half century despite relatively high initial development and school attainment levels. This puzzle, however, can be resolved by considering educational achievement, a direct measure of human capital. We introduce a new, more inclusive achievement measure that comes from splicing regional achievement tests into worldwide tests. In growth regressions, the positive growth effect of educational achievement fully accounts for the poor growth performance of Latin American countries. These results are confirmed in a number of instrumental-variable specifications that exploit plausibly exogenous achievement
variation stemming from historical and institutional determinants of educational achievement. Finally, a
development accounting analysis finds that, once educational achievement is included, human capital can account for between half and two thirds of the income differences between Latin America and the rest of the world.”
15. August 2014 at 10:39
Thadeu Freitas,
“Although I appreciate the comparison between China and Brazil, I think that if you want to compare apples with apples, you need to compare China with Brazil from the period of Brazilian military dictatorship, when Brazil had the same political/economic model that China has had for the past two to three decades: a highly centralized political power that overrules people’s choices and directs all resources to building infrastructure. During that period, Brazil grew at the same pace as China does today.”
That’s a pretty good argument, but somewhat overstated. China’s recent growth actually exceeds Brazil’s under Brazil’s dictatorship. Call it 10% growth for China and 8% growth for Brazil. Both numbers are rough so don’t rely on them.
However, your conclusions may not be correct. Brazil’s growth crashed with the end of military rule. By contrast, Taiwan and Singapore have done quite well since they switched to democratic forms of government. That’s actually not quite right either because Singapore has been democratic since independence.
Would a more democratic system in China reduce growth? It is very hard to say. Chile provides another data point. Last time I checked, post-dictatorship growth was higher than under military rule.
15. August 2014 at 12:27
The whole “PISA is a good proxy for IQ” comes from the corrupt scholar Heiner Rindermann, whose arguments were addressed here:
http://wicherts.socsci.uva.nl/wichertswilhelm2007.pdf
“We think that Rindermanns’ paper nicely illustrates three fundamental issues in the study of
group differences. First, in order to understand group differences in some construct it is
necessary to understand the nature of individual differences in this construct and it does not
seem Rindermann adequately understood individual differences in the achievement data he
reanalyzed. Second, when investigating group differences the use of adequate statistical tools
(Mellenbergh, 1989; Muthén, 1991) is crucial, and unfortunately Rindermann fell short of
using this set of appropriate tools. Third, when making controversial statements about the
differences in national g through reanalysis of available data, these data must fit the problem
and must be of unequivocal quality. The PISA, TIMSS, and PIRLS data used by Rindermann
are of reasonable quality but don’t fit to the problem. The IQ data used by Rindermann might
fit to the problem, but are of poor quality”
15. August 2014 at 21:42
Vladimir,
Rindermann is corrupt?
16. August 2014 at 00:22
Brazil has never really had to toughen up to try to win major wars. It’s a huge country on a continent that has been blessed with more peace than most places, so it can dance along enjoying life without worrying that its failure to educate its populace might cost it in the next war.
16. August 2014 at 00:28
The Prussian state pretty much invented the idea that improving their human capital by educating the peasants and teaching them to be better farmers would help Prussia win wars.
16. August 2014 at 00:36
Places that aren’t particularly competitive militarily, either because they are too big (Brazil) or too small (Mexico v. America or Guatemala v. Mexico) or culturally have tended toward passivity (India), have tended not to bother to cultivate their human capital in order to win wars.
William James and Jimmy Carter were always searching for the “moral equivalent of war,” but decadence always beckons. E.g., As a demonstration of American superiority over the Soviets, we Americans landed on the Moon in 1969, but we couldn’t get back in just eight years today because … what’s the point.
The Chinese were like that for much of the last few centuries, but Mao picked lots of fights (with Chiang, with America in Korea, with the Soviets) and that nationalism seems to have motivated the Chinese.
16. August 2014 at 00:45
Most countries could likely raise their average PISA scores by a half standard deviation within a couple of decades if they really tried. Here in the U.S., for example, we could do a lot better if we stopped obsessing over The Gap between white and black. Instead of trying to raise black and Latino averages by a full standard deviation while keeping Asian and white scores flat, if we just tried to raise each race’s average by a half standard deviation we’d probably do better than we’re doing today.
16. August 2014 at 03:52
“Brazil has never really had to toughen up to try to win major wars. It’s a huge country on a continent that has been blessed with more peace than most places, so it can dance along enjoying life without worrying that its failure to educate its populace might cost it in the next war.”
The Parauayan War (1864-1870) was a brutal war(specially for the Paraguayans, but defeating the little country proved to be a difficult task for Brazilians, Argentinians and Uruguayans),and Brazil had engaged in regime change in Argentina and Uruguay. Add to that Brazil-Argentina traditional rivalry, Brazilians’ (sometimes well-grounded)belief that the Spanish-speaking countries of South America are out to get them and the constant rise of populists such as Evo Morales and Strossner, who love to distort History to blame Brazil for their peoples’ problems and Brazil has had all incentive it should have needed to get its act together.
16. August 2014 at 06:09
Peter, Ok, perhaps I was wrong on that. But plenty of libertarians do oppose open borders. Does anyone recall the position of the Libertarian Party?
16. August 2014 at 10:05
Scott, you write:
“Does anyone recall the position of the Libertarian Party?”
Back when I was an adolescent* and still interested in libertarianism, I actually did receive their party platform in the mail (I must have sent them $10 or something). They were *very much* open borders (just like P.J. O’Rourke… another adolescent favorite of mine). That was about 1990 or so.
I do still fondly recall one of my favorite P.J. O’Rourke quotes from that time:
“The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn’t work and then they get elected and prove it.”
*not to say that being “open borders” or a libertarian is an immature view… though in my case it was. But I recall being horrified at the Libertarian Party’s open borders stance back then…. today I’m more in favor of the open borders stance. I’m white and I’ve lived in California all my life, and I have to say that as an adolescent I was much more bigoted than I am today: I’m literally immersed in a sea of Mexican and Latin American immigrants here, and I long ago stopped having a problem with that: their “work ethic” appears to be above average to me (I’ve never seen an immigrant on the corner with a cardboard sign). Of course that’s just an anecdotal story… and here’s another one: my experience with other Latin Americans is similar (I’m most familiar with Argentines, Chileans and Peruvians: all above what I’d estimate the American average work ethic to be… but perhaps that’s because the ambitious ones are the ones I’m more likely to encounter).
As for the influence of “human nature,” on economics here are some recent related thoughts on that (Scott, you’re mentioned in the 1st of these) [1] [2] [3] [4].
Perhaps the author is right: perhaps “entropic forces” beyond our control are more important. In any case, the author has put his ideas on the line: he has a coherent set of core hypotheses, auxiliary hypotheses, and mathematical models derived from them, and he’s shown how the models fit past data, and he’s made a number of testable predictions from these models regarding the future of several economies around the globe: and he’s willing to put his hypotheses on the line: if he’s wrong, he’s said he won’t be adding multiple epicycles: instead he’ll write a postmortem, and wrap it up. How many other econ bloggers have done the same?
16. August 2014 at 14:48
If you want to see chinese growth rates in Brazil, you should look to the years where its industralization took place. Namely, 1930-1980.
Brazil had “Asian” growth rates in GDP/capita only in the 1970s. But who today believes the rates of the “milagre” period were sustainable, given the commodities boom and debt accumulation ?
Before the 1970s, Brazil’s growth rates had been higher than after 1980, but still not in the Asian league.
Most of Latin America, and in fact most developing countries, had higher growth rates in 1950-80 than since 1980.
“The whole point is there’s no X Factor. There are a bunch of dysfunctionalities born from Brazil’s rapid and authoritarian growth in the XX century.
But, once again, Brazil is not sui generis in this regard. Underinvestment in education, public health, infrastructure and public services is a general Latin American problem. It is arguably a problem general to developing countries.
East Asia is the exception. EA countries had rapid industrialisation, rapid urbanisation and authoritarian political systems, but still, somehow, managed to invest in education, health, infrastructure, etc. Most of them also undertook land reforms without arousing the sort of political controversy that divided Latin American countries.
In discussions like this, the focus quickly turns to human capital and labour quality. Then there’s the inevitable rancour about ethnicity, culture, etc., which Rogerio calls the X-factor. Peter Schaeffer is right to stress human capital, but there’s more than one channel through which the “X-factor” works its way into economic outcomes. One channel is human capital. Another is institutions.
Some possibilities for how the “X-factor” might show up as weak institutions :
(1) The elites, being venal and short-sighted, fail to see that investment in human capital would be in their long-term interest. If, for this purpose, they redistributed income just a little bit now, it would pay off as high future growth from which they would benefit directly, as well as indirectly in reduced future redistribution.
This short-sightedness and venality might be exacerbated by ethnoracial heterogeneity within the population. Income redistribution is more likely within a more homogeneous population.
(2) The elites are rationally sceptical about high positive returns to investment in educating the masses, or lowering infant mortality, so they are content to let things slide or change slowly. Spending money in merely accumulating years of schooling without real development of skills might only raise expectations for even more income redistribution in the future.
Conversely, you might say East Asian elites were reasonably confident that educating their own peasants meant, down the line, high-market incomes and lower post-market transfers.
(3) There’s enough social consensus that education and “human development” are Good Things, but there’s a coordination failure. Political consensus is not achieved through a combination of social mistrust and high time preference. It doesn’t really take too much sheer outlay to reduce infant mortality to near developed-country levels or give everbody at least 12 years of schooling. But the rich don’t want to pay for all of it, and the masses, having a high discount rate, prefer the government budget at current revenue levels to be mostly consumption spending rather than investment.
(4) There’s enough consensus but the taxing capacity of the state is primitive. Developed countries mostly garnish formal sector wages (“tax witholding”), but those mechanisms are weaker in poorer countries. Obviously this would be less of an issue in middle-income countries than in low-income ones, but I’m trying to keep things as general as possible because I think the issues raised by Rogerio are not restricted to Brazil.
So why did East Asian countries do things which raised their HDI scores much more than Latin America and other developing countries ? I really don’t know, but the answer goes beyond human capital issues.
16. August 2014 at 14:55
Noumenon72 said,
“That’s not Clark’s observation, someone added those brackets to his thinking. As best I could tell from Google he never cited a source for that Indian textile worker claim.”
The bracketed claim is that “[That Indian textile workers spent only 15 minutes of every hour working.]
Actually, Clark makes precisely that observation in A Farewell to Alms. He also has several papers on Indian textile mills in the 1920s and 1930s all of which focus on labour quality.
16. August 2014 at 14:58
Scott,
Any thoughts on how Chinese monetary policy has fared over the past year?
As a casual observer it is fairly frustrating trying to follow along. But in terms of forward guidance, it doesn’t seem like many countries are targeting gdp anymore so then China currently is. They don’t have the luxury of well functioning markets to transmit policy, but they seem to be doing a good job of slowly pushing the reform program along while maintaining growth targets.
Do you see this as a test of gdp targeting at all? Or does the reform process and/or the underdeveloped free market portion of the economy render this too unique of a situation to draw any larger conclusions from?
16. August 2014 at 15:46
Would the rate of growth be more closely related to the rate of growth in freedom than in the level of freedom.
16. August 2014 at 16:23
the rate of growth in freedom
spoken like a true American
16. August 2014 at 19:34
ssumner,
From the Libertarian party platform.
“We support the removal of governmental impediments to free trade. Political freedom and escape from tyranny demand that individuals not be unreasonably constrained by government in the crossing of political boundaries. Economic freedom demands the unrestricted movement of human as well as financial capital across national borders. However, we support control over the entry into our country of foreign nationals who pose a credible threat to security, health or property.”
16. August 2014 at 22:14
Tom Brown,
“I’ve never seen an immigrant on the corner with a cardboard sign” is both substantially true and deeply misleading. Immigrants have EBT (food stamps) cards instead. It’s not widely known, but immigrant welfare utilization is very high (and inexorably rising). See “Welfare Use by Immigrant Households with Children – A Look at Cash, Medicaid, Housing, and Food Programs” (http://cis.org/immigrant-welfare-use-2011)
“In 2009 (based on data collected in 2010), 57 percent of households headed by an immigrant (legal and illegal) with children (under 18) used at least one welfare program, compared to 39 percent for native households with children.”
“Households with children with the highest welfare use rates are those headed by immigrants from the Dominican Republic (82 percent), Mexico and Guatemala (75 percent), and Ecuador (70 percent). Those with the lowest use rates are from the United Kingdom (7 percent), India (19 percent), Canada (23 percent), and Korea (25 percent).”
Victor Davis Hanson isn’t a quantitative analyst, but is a gifted writer. He has written eloquently how mass immigration has turned much of California into a welfare dependent, crime ridden, trashed out, rural slum. See “Life with the Vandals” (http://www.city-journal.org/2012/22_3_diarist-selma-ca-vandalism.html), ” Two Californias – Abandoned farms, Third World living conditions, pervasive public assistance — welcome to the once-thriving Central Valley.” (http://www.nationalreview.com/articles/255320/two-californias-victor-davis-hanson/page/0/1), and “Do We Want Mexifornia?” (http://www.city-journal.org/html/12_2_do_we_want.html).
I appreciate your perspective on immigration, but I would like to suggest that selection bias (as you suggest), observation bias, and confirmation bias may all be at work. For some general discussions, see the comments (some of them mine) over at “About what am I optimistic and pessimistic?” (http://marginalrevolution.com/marginalrevolution/2011/09/about-what-am-i-optimistic-and-pessimistic.html), “Practical gradualism vs. moral absolutism, for immigration and revolution” (http://marginalrevolution.com/marginalrevolution/2014/02/practical-gradualism-vs-moral-absolutism-for-immigration-and-revolution.html), and “Do low wages for unskilled workers weaken the case for more immigration?” (http://marginalrevolution.com/marginalrevolution/2013/05/do-low-wages-for-unskilled-workers-weaken-the-case-for-more-immigration.html#sthash.IufqIjY6.dpuf).
16. August 2014 at 22:15
Daniel,
“spoken like a true American”
BLOTD
16. August 2014 at 22:56
pseudoerasmus,
“Brazil had “Asian” growth rates in GDP/capita only in the 1970s”
The Angus Maddison data shows high growth rates (for Brazil) from 1940 to 1980. By decade (using the last year) the numbers are 1950 (5.7%), 1960 (6.5%), 1970 (5.74%), 1980 (8.13%). FRED has comparable numbers for the decades ending in 1960 (6.57%), 1970 (7.82%), and 1980 (7.6%).
These numbers don’t match Japan or China in their peak growth years. However, they are respectably “Asian”.
“Most of Latin America, and in fact most developing countries, had higher growth rates in 1950-80 than since 1980.”
That’s an excellent, but little known observation. Why growth slowed after 1980 (broadly, not just in Brazil) isn’t clear. One theory is the shift from ISI (Import Substitution) to neoliberalism. The conventional wisdom (CW) is the ISI failed and phase change to neoliberalism was mandatory. Dani Rodrik has shown CW reflects the dominant ideology of our time, not the facts on the ground.
A more radical theory is that post-WWII growth (worldwide) was (partially) driven by a uniquely favorable natural resource environment (global availability of very cheap crude oil). When the that came to an end (around 1980), growth slowed dramatically, never to resume (at the same speed). See http://scarcewhales.blogspot.com/2009/09/what-is-it-about-46-barrels-per-year.html for some data. The bottom line is that oil consumption per-capita grew explosively from 1945 to 1980 and declined thereafter.
More later…
17. August 2014 at 05:15
“Instead of trying to raise black and Latino averages by a full standard deviation while keeping Asian and white scores flat, if we just tried to raise each race’s average by a half standard deviation we’d probably do better than we’re doing today.”-Steve Sailer
I keep hearing “racial realists” saying that American groups already score higher than their folks back at home and that the real American problem is Black/Hispanic underachievement (scoring higher than their African and Mexican counterparts is cold confort when they must compete with Caucasians and Asian Americans and America must compete with China and Europe). Do Asian Americans, which benefit from supposedly superior work ethics and genes and the educational opportunities afford by the richest contry on Earth, have much room for improvement? What about American Caucasians?
17. August 2014 at 09:17
Paul, I don’t see monetary policy as being a big issue in China. It’s fine, and tells us very little about NGDPLT. The issue is supply-side reforms–how fast will they be able to do them?
Peter, Interesting, so when Ron Paul ran on the Libertarian Party platform did he support open borders?
You said:
Why growth slowed after 1980 (broadly, not just in Brazil) isn’t clear. One theory is the shift from ISI (Import Substitution) to neoliberalism.”
I lived through that period and followed policy developments quite closely. It’s hard to think of a single theory that is more at variance with the facts than that one. Reforming economies did far better after 1980 than those that stuck with ISI, it’s not even close. Who advocates that nonsense?
17. August 2014 at 09:53
“It’s hard to think of a single theory that is more at variance with the facts than that one. Reforming economies did far better after 1980 than those that stuck with ISI, it’s not even close. Who advocates that nonsense?”-S. Sumner
Ha Joon Chang (Bad Samaritans, Kicking Away the Ladder) does, doesn’t he? From a review (http://zompist.wordpress.com/2008/02/01/the-failure-of-neoliberalism/)of Bad Samaritans):
“In the 1960s and 70s, under protectionist import substitution policies, the developing world grew at 3.0% annually. In the 1980s and beyond, under neoliberalism, the rate was 1.7%.
Where neoliberalism was implemented earlier and more thoroughly, in Latin America, the contrast is even greater: 3.1% in the 1960s/70s; 1.7% in the 1990s; 0.6% in the 2000s.
Africa didn’t grow much in the ‘bad old days’ (1 to 2% a year), but it’s shrunk under neoliberalism.
Mexico grew at a rate of 3.1% under import substitution (1955-82); neoliberalism was a disaster, with growth rates from 0.1% (1980s) to 0.3% (2000s) to 1.8% (1990s). The free trade agreement with the USA wiped out whole swaths of Mexican industry.”
17. August 2014 at 10:10
Peter Schaeffer :
Average growth rates GDP/capita, Brazil
Maddison Project
1940s : 2.95%
1950s : 3.4%
1960s : 2.73%
1970s : 5.45%
Penn World Tables 7.1
1950s : 3.81%
1960s : 4.53%
1970s : 6.09%
PWT 8.1
1950s : 3.49%
1960s : 4.75%
1970s : 5.08%
FRED
1960s : 3.23%
1970s : 5.92%
(FRED must be using IMF data since they cut off at 1960.)
I would say Brazil’s growth rates up to 1980 might be called “Southeast Asian” but not quite in the same league as South Korea, Taiwan, Japan and China since 1990. I don’t mention Singapore and Hong Kong because it’s just not fair to make comparisons with those two. South Korea and Taiwan had 4 consecutive decades where the average growth rate of GDP/cap was above 5% p.a. China has so far had 3 such decades. Japan’s industrialisation started earlier and it would trail off earlier, but in the post war period it had 2 decades above 7% per annum.
17. August 2014 at 11:01
Developing countries, excluding China and India, did grow faster in the 1950-80 period than in the period since. But it’s questionable whether the growth rates in the earlier period were sustainable in the long run. It’s also possible there were unique global circumstances in the post-war period (e.g., absorption of new technologies) that do not obtain as much today. So I’d be sceptical about whether similar outcomes are reproducible under ISI policies today.
“The conventional wisdom (CW) is the ISI failed and phase change to neoliberalism was mandatory. Dani Rodrik has shown CW reflects the dominant ideology of our time, not the facts on the ground.”
Rodrik’s argument is that ISI per se did not fail at the micro level, but that after 1973 or 1979 (depending on country) its practioners could not maintain macro stability. They did not make the required changes in fiscal & monetary policies to deal with the external shocks.
That may very well be true, but in the case of Brazil after the 1960s I think there was a strong populist impulse to maintain demand even at high risk. When the oil crises hit in the 1970s, Brazil, instead of adjustment via demand contraction, chose to grow its way out of current account imbalances by…accumulating external debt and expanding investment in state-owned enterprises. That’s hardly a recipe for sustainability and I seriously doubt it could have happened without “macroeconomic populism”.
17. August 2014 at 11:14
(The idea, I guess, was to invest more in the export sector, then export more, suppress imports with more import substitution, then import less, and also hope for oil prices to fall fairly soon. Naturally, things did not work out too well by the early 1980s.)
17. August 2014 at 14:36
Peter, you write:
“He has written eloquently how mass immigration has turned much of California into a welfare dependent, crime ridden, trashed out, rural slum.”
Of course I’m only speaking from my personal experience, but having lived in California all my life, that doesn’t sound at all like the California I’m familiar with, even though it is evident that there are many more immigrants now than when I was a little kid. I’m president of our homeowner’s association: we have 110 middle class homes in our neighborhood, about 30% of which are occupied by immigrants. I live right next door to a Mexican family. Our houses are 1960s tract homes, nothing special. I rent two homes out to immigrant families in nearby cities, and I’ve been doing it for a decade: no problems. I’m extremely skeptical of that statement you made. Of course I live in a nice place: Goleta, right next door to Sana Barbara (which I’ve lived in as well), but I have family scattered all over the state. But even though this is a nice area, there are a LOT of immigrants here, some of which are low income, but the ones I see and interact with on a daily basis are hardworking people, business owners, etc. I have a lot of admiration for them. I wouldn’t think twice about taking a midnight stroll down to the corner market to get something. (Santa Barbara is a walking town: you can walk everywhere you need to go, which I did all the time when I used to live downtown w/o incident or worry). I’d trade our (almost exclusively white) homeless population for an equal measure of immigrants any day.
I also do my share of traveling around the state, and I just don’t encounter what you describe anywhere. Nor have I noticed any worrisome trends.
My priors are very strong pro-immigrant from my life experiences here. I understand ethnic anxiety though, having experienced it as a teen. But it’d take some very compelling evidence to change my mind at this point.
17. August 2014 at 15:26
Some of the more intelligent anti-immigration stuff sounds a little bit like the neoreactionary/Dark-Enlightenment/Magic-the-Gathering material I first encountered here. Their writing can sound intelligent and thoughtful, but dig a bit more and it won’t be long until you encounter stuff like this.
17. August 2014 at 15:49
The main “Heroes of the Dark Enlightenment” Magic-the-Gathering type trading card page is down, but you can still find some of the “cards” out there. Some of it is very very creepy.
18. August 2014 at 04:29
Thiago, That’s nonsense. The countries that adopted neoliberal policies did better than those that stayed with ISI, it’s not even close.
18. August 2014 at 07:16
“Thiago, That’s nonsense. The countries that adopted neoliberal policies did better than those that stayed with ISI, it’s not even close.”
I agree, but you asked “Who advocates that nonsense?”, didn’t you? To the best of my knowledge, Ha-Joon Chang and lots of other famous economists do. In fact, what surprises me the most is his conflating ISI with the Asian Tigers’ export-led model
18. August 2014 at 07:26
Thiago,
Professor Sumner isn’t saying nobody advocates that nonsense. In fact, he has argued, in the past, against that very same line of reasoning. Instead, he is pointing out that it is, in fact, nonsense.
The effects of neoliberal economic policy on inequality and even living standards in general are up for reasonable discussion. The effect of neoliberal economic policies on productivity are not. They are unambiguously positive. A commentator who is not willing to admit that neoliberal economic reforms have had some positive effect on productivity is simply not willing to engage in rational discussion.
18. August 2014 at 08:13
Thiago, Sorry if I overreacted, I thought you were agreeing with that view. Yes, I guess if East Asia is put in the ISI camp than that would explain things. Of course the reason Latin America edged away from ISI during the last few decades of the 20th century was precisely because East Asia (and later Chile) had done so well with an export-oriented model.
18. August 2014 at 08:38
Anon- I agree that neoliberal reforms were better than the status quo was. Even if I didn’t think that neoliberalism should have been tried instead of ISI, it would still be evident that after the ISI model stopped working(in Brazil, it means late 70s or early 80s), there was no rational alternative to neoliberal reforms (it was stupid to wait until the mid-90s to have something done). I am just saying that opposition to neoliberalism is a very powerful force among Third World economists, who think the strong GDP growth in the 60s and 70s proves them right in the same way many American liberals ascribe the postwar economic expansion to the Roosevelt-Truman-LBJ liberal consensus, and Asian Tigers’ economists, who see their countries’ success as a justification of their faith in state economic interventionism.
18. August 2014 at 09:22
S Sumner-“I guess if East Asia is put in the ISI camp than that would explain things.”
Yes, it would, but it is an unjustifiable choice, I think, they are different models and delivered, as you said, different outcomes-even if ISI had its good days. As I said, Chang’s argument for Latin American ISI, when his ostensible inspiration for opposing neoliberalism is Korea’s success, is puzzling and so is his favoring Latin American ISI over neoliberal reforms. Apparently, he does not like neoliberalism and that’s all.
18. August 2014 at 14:52
“Interesting, so when Ron Paul ran on the Libertarian Party platform did he support open borders?”
Not sure. Didn’t find an answer online.
“It’s hard to think of a single theory that is more at variance with the facts than that one. Reforming economies did far better after 1980 than those that stuck with ISI, it’s not even close. Who advocates that nonsense?”
Dani Rodrik addresses this question a couple of times.
“Does import substitution deserve its unsavory reputation?”
http://rodrik.typepad.com/dani_rodriks_weblog/2007/08/does-import-sub.html
“Industrial policy as picking stocks?”
http://rodrik.typepad.com/dani_rodriks_weblog/2007/08/industrial-poli.html
Quotes
“Similarly, just because South Korea, Taiwan, and a few others have been successful with industrial policy, it doesn’t mean other countries should emulate them. Most countries are better off staying away from trying to “pick winners.”
I like this criticism because at least it grants that countries in East Asia have been successful with industrial policy. There are still people who think East Asia would have grown faster if they had not employed industrial policies.”
“Consider the productivity growth numbers Bosworth and Collins have generated for different regions of the world by decades.”
The table shows that TFP growth by decade was much higher under IS than the Washington Consensus (WC) except in South Asia.
“The most telling chart I have seen in a long time”
http://rodrik.typepad.com/dani_rodriks_weblog/2010/06/the-most-telling-chart-i-have-seen-in-a-long-time.html
“Ignore the intermediate period of debt crisis (1975-90) and focus on the differences between the periods of import-substitution (IS, 1950-1975) and Washington Consensus (WC, 1990-2005). What do we see?
Labor productivity under IS grew at a rate that is double the rate under WC.
The rate of labor productivity growth within sectors (the component identified as “within” in the chart) was comparable under the two policy regimes.
The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change — labor moving from low to high-productivity activities — under WC than under IS.”
Perhaps the most cogent critique of Rodrik’s thesis is that IS led to Current Account / foreign exchange / debt crises that hobbled growth. Rodrik’s main counterargument is that the crises were a consequence of poor macroeconomics. A different counter argument (also used by Rodrik) is that the WC has produced some stellar debt crises (notably Argentina).
The corollary is the general absence of WC success stories and the notable failures. For example, Mexico was considerably more successful with IS than the WC.
Rodrik has another paper worth noting in this context “DIAGNOSTICS BEFORE PRESCRIPTION”
It has a quote that has considerable bearing on this debate.
“A final source of dissonance has to do with the real successes in development. There has not been a greater instance of poverty reduction in history than that of China in the quarter century since the late 1970s. Yet can anyone name the (Western) economists or the piece of research that played an instrumental role in China’s reforms? What about South Korea, Malaysia, or Vietnam? In none of these Asian cases did economic research, at least as conventionally understood, play a significant role in shaping development policy. The same is true of other long-term successes elsewhere, such as Botswana and Mauritius.”
The germane point is that greatest success stories of our time haven’t been a product of the WC nor IS (but closer to IS than the WC).
18. August 2014 at 14:55
Peter, sorry, I didn’t mean to suggest a tie between yourself and white separatists (or out and out neo-Nazis in Kevin D’s case)… it’s just the last time I went down this rabbit hole on Noah’s blog, I was a little disturbed to find that’s where I ended up.
18. August 2014 at 16:53
But does it matter if growth was higher in 1950-75 than in 1990-2005 if the high growth rates in the earlier period were a non-repeatable and non-sustainable combination of input accumulation in predominantly agricultural economies and rapid productivity growth due to postwar technological gains ? That’s separate from the critique that links ISI policies with macro disequilibria.
Thiago says,
“I am just saying that opposition to neoliberalism is a very powerful force among Third World economists, who think the strong GDP growth in the 60s and 70s proves them right in the same way many American liberals ascribe the postwar economic expansion to the Roosevelt-Truman-LBJ liberal consensus, and Asian Tigers’ economists, who see their countries’ success as a justification of their faith in state economic interventionism.”
But that’s because the neoliberal critique relies mostly on a counterfactual and counterfactuals will get disputed.
In the UK post-79 average growth in TFP has not been higher than pre-79 ( http://research.stlouisfed.org/fred2/series/RTFPNAGBA632NRUG# ) so the argument has to be about the sustainability of the pre-79 policy regime. If you’ve finished assimilating that big cluster of technological innovations from 1930s-50s and you must subsequently rely on a slower rate of innovation, then the same rate of growth can only be maintained by gains in institutional efficiency.
18. August 2014 at 20:49
pseudoerasmus,
“Underinvestment in education, public health, infrastructure and public services is a general Latin American problem. It is arguably a problem general to developing countries.”
That’s a decent theory. However, it is very unclear what it has to do with Latin America. The IMF WEO (April 2014) database has a wealth of statistics on government spending as a percent of GDP. The Latin American numbers are generally high and show no obvious correlation with results. Government spending is just 13.98% of GDP in Guatemala. However, the government of Honduras spends 30.87% of GDP without dramatically better results (that I know of). Ecuador at 42.46% of GDP isn’t winning any prizes. Chile at 23.69% is better regarded.
The government of Brazil spends 40.47% of GDP and spending has been around 40% of GDP as far back as the data is available (1996). Interestingly enough only Argentina (47.90%) and Ecuador (42.46%) spend more than Brazil. Costa Rica is (perhaps) the best regarded government in the region and only spends 19.81% of GDP.
Other sources provide some statistics on public education spending as a percent of GDP. Apparently, Brazil spends significantly more than the United States on public education.
Elite driven underinvestment as an explanation for poor long-term growth makes for a useful trope. However, the facts on the ground don’t fit the model.
Of course, you can argue that even very high spending levels don’t necessarily translate into high quality investments in education, health care, infrastructure, etc. Indeed they don’t. However, now we into a public policy realm far removed from elite aversion to taxation / spending.
A useful parallel might be any number of urban areas in the United States where truly fantastic levels of public spending on education yield rather dismal results. For example, LAUSD (Los Angeles) spent $578 million (not a typo) to build one high school.
“There’s enough consensus but the taxing capacity of the state is primitive”
That’s a good theory. However, it’s not supported by observed spending levels in Latin America.
I would be the first to argue that “human capital” shows up in multiple ways beyond PISA scores. My original list included education, work ethic, saving, entrepreneurship, homogeneity (social cohesion), and family stability. Other folks added crime aversion, and a preference for effective government.
Asia has a wealth of “human capital” in all of those areas. Latin America does not.
More broadly your 4 models of “weak institutions” are all interesting and perhaps applicable to some countries. Brazil does not seem to be a match for any of them.
18. August 2014 at 21:39
pseudoerasmus,
“It’s also possible there were unique global circumstances in the post-war period (e.g., absorption of new technologies) that do not obtain as much today.”
This point can be argued either way. I have already argued that cheap oil was a material plus in the pre-1980 period that is now long gone. However, my view on this point isn’t mainstream. Conversely, shipping and communications are now much cheaper than in the pre-1980 period. Arguably potential growth in less developed countries might be even higher now, than it was back then.
“Rodrik’s argument is that ISI per se did not fail at the micro level, but that after 1973 or 1979 (depending on country) its practitioners could not maintain macro stability. They did not make the required changes in fiscal & monetary policies to deal with the external shocks.”
That’s not my reading of Rodrik (see the links above). His strong defenses of IS suggest otherwise. Beyond that he clearly doesn’t see much value in the Washington Consensus.
There is certainly an argument that IS led to CA imbalances that were hard to correct, with serious short-term and medium-term consequences. However, the converse point is that the WC has produced some amazing foreign debt crises as well. Worse, the WC has failed to produce any Latin American success stories that I know of.
18. August 2014 at 22:05
It’s easy to argue that neoliberal reforms (WC) have outperformed IS. However, is the data really there to support such a claim? Mexico and Brazil are both large and have plenty of data available. In both cases, the most striking thing is how poorly both countries have performed since they abandoned IS. For example, Mexico’s GDP grew 621% from 1950 to 1981. From 1981 to 2011, Mexico’s GDP hasn’t even doubled.
Of course, you can argue that that Mexico in 1981 was a bubble doomed to burst (probably true). However, neoliberal reforms haven’t yielded comparable growth rates in 30 years. That’s a rather long time to wait for a supposedly superior policy to pay off.
The per-capita data for Mexico is worse (FRED series RGDPCHMXA625NUPN). From 1950 to 1981, real per-capita GDP tripled. From 1981 to 2010 real per-capita GDP grew by roughly 10%. Ouch.
The Brazilian data is comparable. Real per-capita GDP quadrupled from 1950 to 1980. From 1980 to 2010 real per-capita GDP rose by just 21%. See FRED series RGDPL2BRA625NUPN.
It’s easy to argue that the Asian export model has outperformed IS. Conversely, the Asian export Tigers have generally protected their domestic markets with tariff and non-tariff barriers (Rodrik). What they have certainly not done, is to adopt neoliberalism and the WC. As best I can tell, neoliberalism and the WC are not characterized by success stories.
I am reading an book about politics (not economics) that has some bearing on this subject. The title is “Opening Mexico – The Making of a Democracy”. The authors (J. Preston, S. Dillon) are basically enthralled with the liberal transformation of Mexico, that changed an authoritarian one-party state into a more legitimate democracy. That fact that the same process of liberalization (in the economic realm) yielded (and still yields) rather poor results is lost on them. They actually appear to praise the handing of the national telephone monopoly to Carlos Slim.
19. August 2014 at 02:40
“Elite driven underinvestment as an explanation for poor long-term growth makes for a useful trope. However, the facts on the ground don’t fit the model.”
We agree on the cognitive ability dimension of human capital and I agree that’s more important. I’m just saying even in spite of that there has been underinvestment. Educational attainment in Brazil — just in terms of years of schooling — lagged behind East Asia for a long time. You can’t address that by citing aggregate government spending data.
“That’s not my reading of Rodrik (see the links above).”
Read your own link http://rodrik.typepad.com/dani_rodriks_weblog/2007/08/does-import-sub.html
“With regard to the debt crisis, the argument that gives ISI a causal role mixes up microeconomics with macroeconomics. ISI is about “distorting” relative prices and the sectoral allocation of production and investment. The debt crises were about mismanaging the relationship between aggregate expenditures and incomes. You can have as distorted a structure of relative prices as you want, but still run balanced budgets and zero current account deficits. Conversely, you can be extremely outward-oriented and have free-trade regimes, but still face currency and debt crises if your macro and exchange-rate policies encourage over-spending. (If this were a classroom, I would ask my students to fill the implied 2×2 matrix with real world country examples.)”
So Rodrik disputes that ISI and macro failures are related. He thinks the latter are exogenous policy factors.
19. August 2014 at 06:54
pseudoerasmus,
“I’m just saying even in spite of that there has been underinvestment”
What exactly does “underinvestment” mean in a country (Brazil) that spends (public sector) more on education than the United States? Clearly not a shortage of Reals. Of course, you can always allege malinvestment in education. That’s probably correct. The Economist stated that 50% of education dollars go into pensions. Just reading it in the Economist doesn’t make it a fact. However, Brazil is well known for absurdly lavish (and much worse, pervasive) public sector pensions. That makes the 50% claim for education plausible, but still unproven.
Years of schooling in Brazil do appear low in the UN HDR report (7.2 years) as do high school graduation rates. See http://www.iadb.org/en/topics/education/infographic-high-school-graduation-rates-in-latin-america,7110.html for some Latin American data. Chile has significantly better high school graduation data (not surprising). Costa Rica is much worse (surprising to me).
However, there are at least two problems here. First, given the financial data, “underinvestment” doesn’t explain the years of schooling data. A deeper point is that years of schooling are probably irrelevant. See “Schooling, educational achievement, and the Latin American growth puzzle” by Eric A. Hanushek and Ludger Woessmann. A few quotes
“Why did Latin America have such a poor growth performance relative to Asia and even MENA, given its high schooling level in 1960? While much attention has been given to institutional and financial factors, we suggest that the level of educational achievement (or cognitive skills, which we use interchangeably here) is the crucial component of the long-run picture.”
“In simplest terms, while Latin America has had reasonable school attainment (years of schooling), the skills of students remain comparatively very poor. In terms of student achievement on international tests, both Latin America and Sub-Saharan Africa are near the bottom of the international rankings, while MENA and especially East Asia are much higher.”
Note that I added the phrase “(years of schooling)” above as an explanatory note. The rest of the paper makes it clear that this is what the authors meant in the context of the quote.
“Our interpretation is simple: Even though many things enter into economic growth and development, the educational achievement of the population are extremely important for long-run growth. Moreover, in the presence of measures of educational achievement, school attainment does not even have a significant relationship with growth. This finding corroborates the stylized fact discussed in the literature that performance on years of schooling data is largely inconsistent with growth performance (Bils and Klenow, 2000; Easterly, 2001; Pritchett, 2001, 2006), suggesting that considering acquired skills rather than time in school provides an explanation for this inconsistency.”
“The performance of Latin American countries on the worldwide student achievement tests has been truly dismal.”
“Educational achievement is significantly associated with economic growth in the worldwide growth regressions. It increases the explanatory power of standard growth models considerably and renders the effect of years of schooling insignificant. Years of schooling appears relevant for economic growth only insofar as they actually raise the knowledge that students gain as depicted in achievement tests. Finally, when modeling a curvilinear relationship between the standard international skill metric and growth, the test score-growth nexus does not differ significantly between Latin America and the rest of the world.”
“So Rodrik disputes that ISI and macro failures are related. He thinks the latter are exogenous policy factors.”
That’s my reading of Rodrik as well. Personally I think he goes to far in disavowing the link between ISI and debt crises. However, he is quite correct in pointing out that the WC / neoliberalism has produced some impressive debt crises as well. Perhaps the more germane is what the WC / neoliberalism hasn’t produced… Sustained economic growth.
19. August 2014 at 07:48
I agree with all that ! It’s ability that matters in the final analysis, not years of schooling and not dollars per pupil. I agree. You are preaching to the choir. But even low potential can be underutilised.
http://webarchive.iiasa.ac.at/Admin/PUB/Documents/IR-06-005.pdf
In 1970 almost 1/4 of Brazilians aged 15-19 and almost 1/3 in the 20-24 cohort had ZERO education ! That’s laughable for a country which experienced such high rates of growth in the preceding decades.
Did that educational deficit really make zero difference ?
19. August 2014 at 09:19
Peter, Come on. Hong Kong comes in number one on every economic freedom ranking I’ve ever seen, and Singapore is number 2. Brazil is #114.
If you are going to argue that Brazil has neoliberal polices and East Asia does not, then I guess we speak totally different languages, making conversation impossible.
19. August 2014 at 12:01
By the way Hanushek has got a paper where he does a simulation of the impact on long-term growth of a mere 1/4 SD increase in PISA scores. The effect is nothing to sneer at over the long haul. I think that’s informative about what might have been, if Brazil had achieved something as unambitious as 100% primary school enrolment in 1970 (as opposed to 70-75%).
Peter says,
This point can be argued either way. I have already argued that cheap oil was a material plus in the pre-1980 period that is now long gone. However, my view on this point isn’t mainstream. Conversely, shipping and communications are now much cheaper than in the pre-1980 period. Arguably potential growth in less developed countries might be even higher now, than it was back then.
Maybe for the very poorest of the poor countries, but I don’t see that being likely for middle-income countries which most Latin American countries qualify as. Brazilian income is around 5 times its 1950 level and at least 6 times its 1930 level. The low-hanging fruit of labour mobilisation from the sticks to the cities has been mostly picked. Which Latin American countries were the mediocre performers of the ISI period ? Not the poorest ones, but the middle-income countries of Argentina, Chile and Uruguay. They had already done the easy stuff before 1930 !
Brazil’s TFP grew at ~2% per annum in 1950-75, when the whole world had unusually high TFP growth rates. I find it amazing that you, who appear to be even more of a human capital fatalist than me, could believe circumstances are just as favourable today for developing countries…because of shipping & communication costs ?
By the way, I am not defending neoliberalism, so much as agreeing with the neoliberal critique of ISI. I don’t see that neoliberalism has done all that much for developing countries, either. (It is more arguable with the Anglosphere versus continental Europe.)
Take the neoliberal poster boy, Chile, which has clearly done better in per capita income during the last quarter-century than its closest cousins Argentina and Uruguay ( http://pseudoerasmus.files.wordpress.com/2014/07/southamerica1.gif ). But this isn’t because the efficiency of the Chilean economy has been converging with the United States. To the contrary neoliberalism does not appear to have reversed Chile’s long-term divergence ( http://research.stlouisfed.org/fred2/series/CTFPPPCLA669NRUG ) whereas the picture is more mixed for Argentina ( http://research.stlouisfed.org/fred2/series/AVHWPECLA065NRUG ). What neoliberalism seems to have done is reverse Chile’s “European” trend in working hours ( http://research.stlouisfed.org/fred2/series/AVHWPECLA065NRUG “” that sudden huge spike at the end of the 1990s looks weird but I can’t find contrary information ) whereas Argentina is still on that Euro-lifestyle path ( http://research.stlouisfed.org/fred2/series/AVHWPEARA065NRUG ). This makes sense because in Chile you would expect a sizeable labour supply response from labour market deregulation. FRED doesn’t seem to have labour force participation rates going back before mid-80s but PWT 8.0 shows a pretty large increase LFP in Chile (and Brazil) but not in Argentina.
19. August 2014 at 12:07
I accidentally repeated one of the FRED charts and skipped the TFP chart for Argentina : http://research.stlouisfed.org/fred2/series/CTFPPPARA669NRUG
19. August 2014 at 12:12
And, yes, even Argentinians clock more hours by European standards but the point was Chile and Argentina had seen fairly rapid declines in work hours even as their economies weren’t growing all that fast in the 1950-75.
19. August 2014 at 13:44
pseudoerasmus,
I followed your link. Very interesting to say the least. 30% of Brazilian adults aged 20-24 had no education in 1970? Wow. That’s astounding to me (living in the USA far too long obviously). I am not sure if I have ever met a person with zero education (and I have known lots of poor people).
However, by 2000 the numbers are very different. For males aged 20-24, 5.41% have zero education (and 3.43% of the females). In fact all of the numbers for both sexes show large gains between 1970 and 2000.
So where is the education driven economic boom?
19. August 2014 at 14:59
Scott, you said “Paul, I don’t see monetary policy as being a big issue in China. It’s fine, and tells us very little about NGDPLT. The issue is supply-side reforms-how fast will they be able to do them?”
Is this because the impact of any supply side reform will be overwhelmingly positive in the aggregate? I see the logic of that. My thoughts were that we’re probably in for a longish, messy, trial and error based reform path. If China pulls it off at all successfully, it might be a great leaning experience for other developing countries.
In my college development economics courses, I don’t recall anyone ever expounding the virtues of stable ngdp growth. Be it from very poor to kind of poor, or China’s next step from kind of poor to not poor (by my canadian standards).
I would have thought market monetarists (from my understanding of it) would find this to be an incredibly useful application of your policy recommendations. And of course your utilitarian liberalism seems like it would find these countries the most worthwhile to push towards a better monetary policy regime. And how cool would it be to see the PBOC first to announce an explicit NGDP level target.
20. August 2014 at 05:20
Paul, I’m not sure Chinese NGDP growth has been all that stable. In any case, I view money as something that affects inflation and the business cycle, not long run growth. For China, long run growth is the overwhelmingly important issue.
20. August 2014 at 21:43
ssumner,
The question is not whether Hong Kong and Singapore are great success stories or not. They clearly are. The question is whether neoliberal reforms have been productive in Brazil, Mexico, etc.
There is no shortage of data showing that Brazil shifted towards liberalization in the late 1980s. For example, according to “A BRIEF HISTORY OF TRADE POLICIES IN BRAZIL: FROM ISI, EXPORT PROMOTION AND IMPORT LIBERALIZATION TO MULTILATERAL AND REGIONAL AGREEMENTS” average (weighted by value added) tariff rate fell from 54.9% in 1987 to 10.2% in 1994. The same paper has other measures of trade protection. All fell dramatically during the period in question.
Another paper, “Neoliberalism and Its Consequences in Brazil” indicates that imports as a percentage of GDP doubled from 1990 to 1999 (from 4.4% to 8.9%). Liberalization also included substantial privatizations. One source, “Privatization in Brazil”, suggests that proceeds from privatization were $105.298 billion from 1990 to 2002. The second paper provides a summary of Brazilian liberalization.
“As the 199os wore on Brazil’s policy stance increasingly conformed to the so-called Washington Consensus. At the beginning of the decade, with the accession of President Collor, import tariffs were rapidly decreased. In percentage terms, average tariffs levels declined by approximately half between i990 and 1994 (Table I). In 1990 President Collor’s first year in power, the vast majority of non-tariff barriers were abolished, rapidly subjecting domestic firms to intense foreign competition. Between 1990 and 1999 the import of goods to GDP ratio rose from 4.4 per cent to 8.9 per cent.
Collor also initiated the process of privatisation. This was at first limited to steel and petrochemicals. However, after President Cardoso came to power in 1995 the privatisation process expanded rapidly into such fields as public utilities and transportation infrastructure. The period since 1995 also witnessed an unprecedented programme of investment liberalisation. For instance, an amendment to the constitution eliminated any differentiation in the legal status of domestic and foreign firms. Foreign capital was allowed to enter sectors from which it was previously excluded, such as oil exploration and public utilities.”
No one would claim that Brazil ever reached the same level of economic freedom as Hong Kong, Singapore, etc. It did not. However, Brazil did make far reaching changes in its economy after the late 1980s. There is no obvious evidence that these changes produced materially better results compared to the pre-liberalization period. Indeed, the reverse is much more plausible. Notably, Brazil continued to have problems with financial flows, exchange rate stability, and it’s current account after liberalization.
As stated above, Hong Kong and Singapore are highly successful according to many measures. They also have the highest PISA scores in the world outside of Shanghai. This raises obvious questions as to the origins of their success (economic policy vs. human capital).
21. August 2014 at 00:16
In 2013 Argentina ranked 160th in Economic Freedom, Brazil 100, Mexico 50, Chile 7. These are very different levels.
Also, the general context matters. The postwar boom (based on cheap energy, catch-up innovation, a liberalising trade environment) made growth comparatively easy in the 1950-1973 period. How you cope with sudden changes in circumstances affects your prospects. The “Deakinite” model (trade protection, wage arbitration, etc) in Australia coped poorly. We have done much better since 1983. But liberalising in the situation of a mature federal democracy with good rule of law and property rights is very different from doing so than when these are not present.
The East Asian model of land reform, investment in education and export-orientation is so different from what Latin America did or did not do, one wonders how anyone can seriously equate the two.
21. August 2014 at 13:45
LFO,
“The East Asian model of land reform, investment in education and export-orientation is so different from what Latin America did or did not do, one wonders how anyone can seriously equate the two.”
Agreed. However, that’s one of my key points. The Asian model that works doesn’t appear to be something a country can create simply via market liberalization. Indeed, the great Asian success stories (Japan, S. Korea, Taiwan, now China) were built via calculated market interventions.
As for investment in education, that’s more complex than you might think. Asian countries are not high spenders on education these days (as a percent of GDP) based on the World Bank data. It’s also true that some Asian countries (notably Japan) achieved very high levels of education (measured by literacy) when they were still quite poor and had only very limited resources. It’s possible that these countries were spending a higher fraction of their limited resources on education, back when they were still quite poor. Insufficient data on that point.
Singapore provides a useful example. Government spending on education is just 3% of GDP. Of course, birth rates in Singapore are low. However, the world bank data also shows that Singapore is a low spender per-pupil (relative to per-capita GDP). See http://data.worldbank.org/indicator/SE.XPD.SECO.PC.ZS/countries/1W?display=default for a data source.
It’s quite true that Hong Kong and Singapore rank very high in the Heritage Economic Freedom rankings. They also rank at the top of the PISA results as well. A broader point is that small economies don’t have that much choice about openness. Import substitution isn’t going to work with a population of just a few million (but exports will).
The numbers for larger countries are more ambiguous. Mexico gets a higher score from Heritage than France. As you point out Mexico is 50 positions (and 9.4 points) higher than Brazil. Mexico also enjoys proximity to the U.S. market. Is Mexico doing better than France? Measured by either growth or per-capita GDP? Better than Brazil? Not so clear. At least for Mexico, Brazil, and France PISA scores have a lot more predictive power than Heritage rankings.
It is generally true (overall) that countries with better scores are better performing than countries with lower scores. Of course, correlation isn’t causation and the countries with better scores also have better PISA results.
“The postwar boom (based on cheap energy, catch-up innovation, a liberalising trade environment) made growth comparatively easy in the 1950-1973 period.”
As stated above, I agree on the cheap energy part although most analysts don’t even consider it to be an issue. However, the rest isn’t so clear. There was trade liberalization before 1973. There has been much more since 1973. See http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:21051044~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html for some data. FDI has also grown tremendously. At the same time, transportation and communication costs have plunged.
Given how far developing countries are behind the economic frontier (the most developed nations of Europe, Asia, and North America), catch-up innovation would not seem to be an issue. In other words, save for cheap oil, the current economic environment for developing countries has never been better. It just doesn’t show up in the growth numbers… In spite of, or because of, neoliberal reforms.
21. August 2014 at 16:08
Peter, You said:
“Indeed, the great Asian success stories (Japan, S. Korea, Taiwan, now China) were built via calculated market interventions.”
I don’t agree with this, with the one exception that economic success is partly correlated with government efficiency. And it is true that China’s government builds infrastructure more efficiently that places like Brazil (or America.) But when you look at normal firms producing goods and services the government dominated sector in China is far behind the private sector. China has done well despite government intervention in the economy. If they had been more laissez-faire, like Hong Kong, they would have grown faster. In Japan firms did well to the extent that they ignored MITI. There is no evidence that mercantilism or planning in East Asia had any role in the economic miracles—the more free market the East Asian economy, the better it did. The same is true in Latin America. The countries that liberalized extensively like Chile did well, and those in the middle like Brazil did so-so, and those that were completely statist like Venezuela did horribly. I had lunch with a Brazilian economist today, and he said Brazil isn’t even close to being as neoliberal as Chile or East Asia. He indicated that Brazil is still very statist.
Even the Soviet Union grew rapidly during 1950-73, and no one (not even leftists) think the Soviet Union had a good economic model. So the 1950-73 growth rates tell us nothing about the model. Look at things from a cross sectional perspective, and you’ll find the more neoliberal economies tend to do better, which isn’t to deny that factors like education also matter a lot.
21. August 2014 at 17:23
Peter Schaeffer. Taking “investment in education” to mean simply expenditure is way too simple. (There is very little correlation between education expenditures and outcomes.) Family effort and expectations matter hugely, for example. So building enough schools and legal environment so everyone can go to school is going to operate differently in a society with strong education attachment and expectations compared to a society where which family you belong to with what connections counts so much more.
Also, market-augmenting interventions operate very differently than market-controlling interventions, but both count as “interventions”.
So, expenditure on education in a low-Gini society with markets open to firm entry are going to operate very differently than expenditures on education in a high-Gini society riddled with bureaucratic barriers to entry.
In a way, it is a version of the socialist calculation problem …
21. August 2014 at 20:20
LOZ,
“There is very little correlation between education expenditures and outcomes”
Indeed, and if you read through this thread you will see my references to Hanushek. Hanushek and his colleagues have been the author of numerous papers documenting the “little correlation” you speak of.
“Family effort and expectations matter hugely, for example”
Indeed, a generation ago Scientific American published a study showing that the children of poor Vietnamese immigrants were thriving in the same schools where black and Hispanic children were failing. See Nathan Caplan, Marcella Choy, and John K. Whitmore, “Indochinese Refugee Families and Academic Achievement,” Scientific American (1992), 36-42.
Of course, Ms. Tiger Mom (Amy Chua) has offered a few comments on this subject and not gotten the most charitable response… Ms. Chua also wrote “World on Fire” which may have been the first book that I personally read questioning neoliberalism.
However, I do take serious issue with the notion that “So, expenditure on education in a low-Gini society with markets open to firm entry are going to operate very differently than expenditures on education in a high-Gini society riddled with bureaucratic barriers to entry.”
There are a couple of very serious theoretical and empirical problems here. First, very few individuals are concerned (personally) about barriers to firm entry in making decisions about personal education. They are concerned about the likely returns to education (the education premium). That implies that countries with high education premiums should have more effective education systems.
As it turns out… The education premium in Brazil is the second highest in the OECD at 256. Japan is below the OECD average at 148. If the education premium (or penalty for less education) actually drove educational outcomes or educational effectiveness then these results should be reversed. They are not.
Of course, we can also look for a relationship between entry barriers (for firms) and educational effectiveness. Earlier I mentioned that Brazil has the second highest education premium in the OECD. Chile is number 1. Of course, Chile is ranked 7th in economic freedom vs. 100th for Brazil. Yet Chile and Brazil have the highest (by far) education premiums and they are almost equal.
A few other examples. The U.S. has low barriers to firm entry and still has the fifth highest education premium. France and South Korea have essentially the same (low) education premiums. South Korea is 26 places ahead of France in the Heritage rankings. Ireland and Greece have similar (somewhat high) education premiums (Ireland is higher). Ireland is number 11 in the Heritage rankings. Greece is number 117 (below Brazil).
Let me offer a different and more explanatory model. Countries that place a high cultural premium on education (“Family effort and expectations”) end up with highly educated populations (as measured by PISA scores and other metrics) and low education premiums. Countries that don’t, don’t.
21. August 2014 at 22:47
ssumner,
Of course, one can argue a counter-factual (that Asian countries would have done even better with a pure free market approach). However, I would allege that it is more useful to observe the policies of these countries (Asian).
One paper, “GROWTH STRATEGIES” by Dani Rodrik has a number of useful observations along these lines.
“The left panel in Table 2 shows Williamson’s original list, which focused on fiscal discipline, “competitive” currencies, trade and financial liberalization, privatization and deregulation.”
“It is probably fair to say that a listing along the lines of Table 2 captures in broad brushstrokes mainstream thinking about the key elements of a growth program. How does such a list fare when held against the light of contemporary growth experience? Imagine that we gave Table 2 to an intelligent Martian and asked him to match the growth record displayed in Figure 1 and Table 1 with the expectations that the list generates. How successful would he be in identifying which of the regions adopted the standard policy agenda and which did not?
Consider first the high performing East Asian countries. Since this region is the only one that has done consistently well since the early 1960s, the Martian would reasonably guess that there is a high degree of correspondence between its policies and the list in Table 2. But he would be at best half-right. South Korea’s and Taiwan’s growth policies, to take two important illustrations, exhibit significant departures from the Washington Consensus. Neither country undertook significant deregulation or liberalization of their trade and financial systems well into the 1980s. Far from privatizing, they both relied heavily on public enterprises. South Korea did not even welcome direct foreign investment. And both countries deployed an extensive set of industrial policies that took the form of directed credit, trade protection, export subsidization, tax incentives, and other non-uniform interventions. Using the minimal scorecard of the original Washington Consensus (left panel of Table 2), the Martian would award South Korea a grade of 5 (out of 10) and Taiwan perhaps a 6 (Rodrik 1996).
The gap between the East Asian “model” and the more demanding institutional requirements shown on the right panel of Table 2 is, if anything, even larger. I provide a schematic comparison between the standard “ideal” and the East Asian reality in Table 3 for a number of different institutional domains such as corporate governance, financial markets, business-government relationships, and public ownership. Looking at this, the Martian might well conclude that South Korea, Taiwan, and (before them) Japan stood little chance to develop.”
and
“The Martian would be puzzled that the region that made the most determined attempt at remaking itself in the image of Table 2, namely Latin America, has reaped so little growth benefit out of it. Countries such as Mexico, Argentina, Brazil, Colombia, Bolivia, and Peru did more liberalization, deregulation and privatization in the course of a few years than East Asian countries have done in four decades. Figure 2 shows an index of structural reform for these and other Latin American countries, taken from Lora (2001a). The index measures on a scale from 0 to 1 the extent of trade and financial liberalization, tax reform, privatization, and labor-market reform undertaken. The regional average for the index rises steadily from 0.34 in 1985 to 0.58 in 1999. Yet the striking fact from Figure 1 is that Latin America’s growth rate has remained significantly below its pre-1980 level.”
Figure 2 shows that Bolivia and Brazil ended up (as of 2000) with the highest structural reform index values with Chile only a bit above the Latin American average.
The question isn’t the virtues of socialism / communism in Asia (or Latin America), but how countries can attain and sustain high rates of growth and/or per-capita GDP (converge with the global economic frontier). The highly successful nations of Asia have done so with policies that diverge quite a bit from the Washington Consensus. Specifically, arguing that China would have done better with an abrupt transition to pure free markets, has to be considered in light of the calamities that befell much of Eastern Europe with the end of the Soviet Union.
Moreover, the Latin American experience doesn’t show a strong correlation (if any) between structural reform and economic performance (comparing countries) or in contrasting the IS and WC eras.
It is easy (and probably correct) to argue that growth was easier before 1980. In my view, the post-1980 period actually offers better growth prospects for developing countries than the pre-1980 period… Save for oil prices. However, that (cheap energy) may be enough to offset everything else.
However, the numbers show a much greater slowdown in Latin American than in non-China East Asia. East Asia (less China) grew at a rate of 7% from 1960-1980 and 6.45% from 1980-2000. Latin America grew at a rate of 5.75% from 1960-1980, but only 2.2% from 1980-2000.
It’s certainly true that countries with the highest Heritage rankings are generally prosperous. It is also true that they have the highest PISA scores. The exceptions (high Heritage rankings and low income levels) appear to have low PISA scores.
Note that I don’t want to appear to overstate the importance of PISA scores per se. Human capital has many dimensions (eight at least) of which educational achievement (not years of schooling) is just one.
22. August 2014 at 03:15
Several growth decompositions for Brazil have shown that its growth collapse after 1980 is largely due to the near-disappearance of capital deepening. Before 1980 capital deepening had accounted for 2/3 to 3/4 of GDP/worker growth. But since 1994 that’s flipped (mostly TFP, very little capital deepening) and the actual rate of TFP growth hasn’t been bad at all since 1994.
Peter, I don’t know if you saw my comments just prior to your last reply to me, where I talked about Chile vs Argentina. Brazil’s working hours are a lot more like Argentina’s than Chile’s. Are Chileans just intrinsically more “East Asian” in their work habits than Argentinians and Brazilians ? It seems to me, more liberalisation in the factor markets might relieve what looks like a supply constraint in the Brazilian economy. Earlier you talked about work ethic, which you proxied by average working hours. I do think there are work ethic differences between Latin America and East Asia, but maybe the better way to talk about them is in terms of different marginal rates of substitution. East Asians reduce working hours at higher incomes than Latin Americans, perhaps, and rigidity in the factor markets reinforces that cultural predisposition. If that’s true, then Latin Americans might “need” neoliberal reforms of factor markets earlier than East Asians. “Basic” neoliberal reforms (privatisation, control of inflation, capital account liberalisation, trade liberalisation, getting rid of multiple exchange rates, etc.) seem to boost efficiency initially, but later, more micro-orientated, “phase 2” reforms may be needed to increase work effort and firm investment.
“It is easy (and probably correct) to argue that growth was easier before 1980. In my view, the post-1980 period actually offers better growth prospects for developing countries than the pre-1980 period… “
But Thailand and Malaysia, still middle-income countries whose PISA scores are more like LA’s than like East Asia’s, also grew more slowly in the last 25 years than in the previous decades. This does not suggest that the global environment is as favourable today as it had been in the post-war period.
22. August 2014 at 07:57
Peter, You said:
“Of course, one can argue a counter-factual (that Asian countries would have done even better with a pure free market approach). However, I would allege that it is more useful to observe the policies of these countries (Asian).”
You missed my point. I am not so much arguing they “could” have done better with more free market policies, I’m claiming that the more free market the policy regime the better they did. In other words I’m looking at actual outcomes, not hypotheticals.
HK and Singapore >> Taiwan >> Japan and S. Korea >> China >> Vietnam >> North Korea.
You said:
“South Korea’s and Taiwan’s growth policies, to take two important illustrations, exhibit significant departures from the Washington Consensus.”
Rodrik makes the same fundamental logical error in almost all the analysis I’ve seen by him. He confuses less that perfectly free market with “interventionist” regime. No country exactly followed the Washington consensus, so that proves nothing. Indeed the US economy is riddled with hundreds of thousands of interventionist policies. But the success of Korea and Taiwan obviously had much more to do with their private firms like Samsung and Acer, than their SOEs. The only useful comparison is across countries–all are a mixture of markets and state intervention.
I certainly agree that economic policy doesn’t explain everything, more highly educated countries will do better, and that may explain part of the Asian/Latin American divergence. But I strongly disagree with the claim that reform in Latin America is not correlated with growth. The more neoliberal countries have done better on average. The correlation would have been even stronger if neoliberal reformers had not erred by adopting insanely counterproductive tight money policies.
22. August 2014 at 12:26
pseudoerasmus,
Sorry about my delayed reply.
“The low-hanging fruit of labor mobilization from the sticks to the cities has been mostly picked”
This is the sort of theory that can be read either way. Of course, it is plausible. However, it also has a bunch of problems. Even at middle-income levels, Latin America is half an order of magnitude or more below the economic frontier (NW Europe, NE/E Asia, the Anglosphere). It’s also true that the Asian success stories didn’t slow down when they reached middle-income status. However, the worst problem is that it doesn’t fit the facts on the ground for Latin America. The recurring theme across several countries is fast growth up until 1980, dismal performance after 1980, and a sharp shift towards neoliberalism.
Of course, it could be that Latin America somehow reached its economic frontier under ISI, and then stagnated subsequently with neoliberalism preventing even worse outcomes. It is also possible that Latin America somehow reached its economic frontier under ISI, and then neoliberalism didn’t make any difference either way. However, the third possibility (the neoliberalism made things worse) can not be ignored and is the simplest interpretation of the data. Occams Razor?
“I find it amazing that you, who appear to be even more of a human capital fatalist than me, could believe circumstances are just as favorable today for developing countries…because of shipping & communication costs?”
Actually, human capital fatalism doesn’t materially influence my view of the pre and post-1980 periods. Cheap energy fatalism, is more germane in this comparison. However, I would add declining trade barriers to the advantages of the post-1980 period (along with declining transportation and shipping costs).
Table 1 in “GROWTH STRATEGIES” by Rodrik provides some aggregate data for comparing these periods. Overall, global growth in lower (3.4%) from 1980-2000 vs 4.5% for 1960-1980. TFP declines from 1.1% (1960-1980) to 0.8% (1980-2000).
However, the global trends mask large regional differences. China does much better from 1980-2000 vs. 1960-1980. Not exactly surprising. Somewhat surprising is China’s astonishing TFP (4.2% 1980-1990, 5.1% 1990-2000). South Asia improves from the first period to the second (growth and TFP). By contrast, Latin America crashes by both measures (growth and TFP). Latin America growth goes from 5.75% to 2.2% and TFP goes from 1.375% to -0.95% (yes, negative TFP).
Perhaps the most important point is that East Asia less China does decline comparing 1960-1980 vs. 1980-2000, but not by much. Growth declines from 7% to 6.45% and TFP declines from 1.2% to 0.9%.
Let me offer a few comments on TFP. TFP is important for a number of reasons. However, it is generally more important for developed countries vs. developing countries. Countries at the global economic frontier can only grow per-capita GDP (roughly) by raising TFP. Of course, capital deepening is also possible, but only with diminishing returns. By contrast, developing countries have vast scope to grow simply via adding capital and adding labor growth. For example, China still has 100s of millions of very marginal farmers. Turning them into service sector and factory workers doesn’t really require TFP. Ordinary captial expansion will suffice. That fact that China also has fast TFP growth is amazing.
FRED has many country data series comparing PPP per-capita GDP to the U.S. (as in “Purchasing Power Parity Converted GDP Per Capita Relative to the United States, average GEKS-CPDW, at current prices for Uruguay”). The data is interesting and doesn’t particularly support (as I see it) the virtues of neoliberalism.
Brazil and Mexico (the big two) both enjoyed fast convergence with the U.S. under IS and diverged badly under neoliberism. See PGD2USBRA621NUPN and PGD2USMXA621NUPN. Brazil peaks at 30.2% of U.S. per-capita GDP around 1980, crashes to 16.8% in 2003 and then recovers modestly to 20.9% in 2010. Mexico reaches 44.1% of U.S. per-capita GDP in 1981 and then crashes to 27.07% in 2003 and then recovers to 28.99% in 2010.
It makes some sense that Brazil and Mexico would have been IS stars. Both are large enough to have sizable domestic markets. Clearly the economic infrastructure built under IS didn’t thrive under the WC.
Argentina (PGD2USARA621NUPN), Chile (PGD2USCLA621NUPN), and Uruguay (PGD2USUYA621NUPN) were all failures pre-1980. In all three cases, they diverged from the U.S. Argentina falls from 41.3% of the U.S. in 1950 to 35.4% in 1980 and continues down to 20.1% in 2002. It rebounds to 31.3% in 2010 (global commodity boom). Chile reaches 27.2% in 1962 and then falls to 13.7% in 1985 (19.1% in 1980) and 33.9% in 2010 (GCB as well). Uruguay falls from 61.4% of the U.S. in 1954 to 28.5% in 1980 and just 18.3% in 1985. By 2003, Uruguay is back up to 19.5%. In 2010 Uruguay is 29.2%.
It is hard to find an obvious pattern here. Perhaps the countries that did the best under IS did the worst under the WC. Chile does seem to have done better under the WC. However, that really amounts to a recovery of prior losses. Note that Rodrik questions the applicability of the WC explanation to Chile. By contrast, Argentina embraced the WC in the 1990s and got an epic crash in 2002 as its reward (25% unemployment for a while).
Note that Chile shows up as a star by some measures of economic reform. However, other measures show that Brazil and Bolivia actually reformed more.
“By the way, I am not defending neoliberalism, so much as agreeing with the neoliberal critique of ISI”
The neoliberal critique of IS makes some sense. Driving growth via domestic demand and not building export industries can easily produce a foreign exchange crisis. Rodrik (in my view) goes to far in attempting to deny this. However, the neoliberal model has its own built-in failure mode. Neoliberalism “hollows out” the tradable goods sector of an economy, trade deficits rise dramatically, governments respond by promoting bubbles in non-tradables (notably housing), debt (private and/or public) expands dramatically, and inevitably the economy crashes.
That’s a reasonable description of several countries in recent years (Argentina, Spain, Greece, Ireland, Portugal, etc.) including the United States. The U.S. moved substaintially towards neoliberalism starting in 1980 and accelerating in 1994 (NAFTA) and 2001 (Bush, WTO, etc.). Before 1980, the U.S. never ran significant trade deficits (or surpluses) save for wartime. Since the Great Depression the U.S. never suffered banking / debt crisis. Since 1980 the trade deficit has risen to very high levels (with considerable variance) and debt / banking crisis have become a recurring theme.
It doesn’t appear to be coincidental that Bush was America’s must neoliberal president and that the trade deficit reached it’s all-time (U.S.) high in 2006/7, the U.S. had a vast boom in non-tradables (investment in housing doubled as a share of GDP, Mortgage Equity Withdrawal reached 9% of Disposable Personal Income), and the economy crashed on his watch. The LFP (Labor Force Participation) and EMPR (Employment Population Ratio) data show that the U.S. economy was dismal before the 2008 crash…
22. August 2014 at 15:56
“Before 1980, the U.S. never ran significant trade deficits (or surpluses) save for wartime.”
Why was the US so ineffective at exporting capital prior to 1980?
22. August 2014 at 16:23
W. Peden,
To export capital the U.S. would have to run large and ongoing trade surpluses. Except for two war related period where Europe was desperate for American goods (1914-1917 and after WWII), the rest of the world hasn’t been that eager to import goods that can be produced domestically or accumulate debt.
22. August 2014 at 17:07
Peter Schaeffer: Countries that place a high cultural premium on education (“Family effort and expectations”) end up with highly educated populations (as measured by PISA scores and other metrics) and low education premiums. Countries that don’t, don’t. So, education premiums are a matter of supply and demand. Not surprising.
But your data also suggests something interesting. That Gini-coefficients and education premiums are correlated (i.e. high Gini-coefficient countries have high education premiums and low Gini-coefficient countries have low education premiums). Which suggests that educational effort is not based on education premiums (since broad educational effort is high where premiums are low: indeed, the premiums are surely low because said effort is so broadly based) but on expectations about their attainability. Which pertain more to the structure of society and which may well lag behind changes in policy regime (such as, say, Chile).
This may suggest that the US is not quite the meritocratic society it likes to think it is, but that is another question.
Neoliberalism “hollows out” the tradable goods sector of an economy,
Or does economic liberalisation tend to lead to the economy reflecting factor endowments more?
22. August 2014 at 17:32
Peter Schaeffer: To export capital the U.S. would have to run large and ongoing trade surpluses. Except for two war related period where Europe was desperate for American goods (1914-1917 and after WWII), the rest of the world hasn’t been that eager to import goods that can be produced domestically or accumulate debt. I have generally found it more profitable to examine the question from the other side–the balance of saving and investment. The US has generally been in the situation of investment opportunities exceeding domestic saving, so it has imported capital for most of its existence. Australia has been in that situation more or less continually for its entire existence.
The “manufacturing moment” in US history lasted about 10 years (1920-1930). Before that, the primary/resource sector was the biggest employer, after, the tertiary/services was the biggest employer. Those who lament the “decline” of manufacturing in the US are about 80 years too late. (And does the current US manufacturing sector really produce less in total than it formerly did in, say, 1928, or merely a smaller proportion of a much bigger gross product?)
22. August 2014 at 20:29
LFO,
“But your data also suggests something interesting. That Gini-coefficients and education premiums are correlated (i.e. high Gini-coefficient countries have high education premiums and low Gini-coefficient countries have low education premiums).”
Highly correlated.
“Which suggests that educational effort is not based on education premiums (since broad educational effort is high where premiums are low: indeed, the premiums are surely low because said effort is so broadly based)”
Almost certainly true. As I stated earlier.
“If the education premium (or penalty for less education) actually drove educational outcomes or educational effectiveness then these results should be reversed. They are not.”
“but on expectations about their attainability”
What exactly does that mean? In any case, “Family effort and expectations matter hugely, for example” provides a considerably more informative model. A generation ago Scientific American published a study showing that the children of poor Vietnamese immigrants were thriving in the same schools where black and Hispanic children were failing. See Nathan Caplan, Marcella Choy, and John K. Whitmore, “Indochinese Refugee Families and Academic Achievement,” Scientific American (1992), 36-42.
“This may suggest that the US is not quite the meritocratic society it likes to think it is, but that is another question.”
On what evidence? Of course, it is very unclear how meritocratic Americans think their country is, which makes comparing expectations with outcomes even more difficult.
“Or does economic liberalisation tend to lead to the economy reflecting factor endowments more?”
Shifting workers from goods production to natural resource extraction makes sense for Australia and Canada. Moving workers from goods production into unemployment doesn’t make sense anywhere. Note that LFP and EMPR have plunged in the U.S. since 2000 and the fall didn’t start with the Great Recession.
22. August 2014 at 20:57
LFO,
“The US has generally been in the situation of investment opportunities exceeding domestic saving, so it has imported capital for most of its existence.”
No. See http://www.econdataus.com/tradeall.html. The U.S. ran trade surpluses from after the Civil War until around 1980. Indeed, the U.S. acted as a global financier from 1920 (too some extent 1900) on, until decades after WWII (replacing the UK). Note that there are contrary claims that the U.S. did import capital during the post-Civil War railway boom.
The sharp rise in the U.S. trade deficit and capital imports since 1980, don’t plausibly reflect any excess of U.S. “investment opportunities” unless you regard credit card debt, home mortgage ATMs, and public sector deficits as “investments”. Stated differently, debt bubbles are not investments, they are debt bubbles. They typically end in ruin. The U.S. is no exception.
“Australia has been in that situation more or less continually for its entire existence”
Aborigines had credit cards? Who knew? Actually, the long-term economics of Australia are unknown to me.
“The “manufacturing moment” in US history lasted about 10 years (1920-1930)”
No. Several sources show that manufacturing peaked as a share of employment and GDP during WWII (no surprise). However, peacetime manufacturing peaked in the 1950s, not the 1920s. See FRED series MANEMP, PAYEMS, and CE160V. For example, http://www.infoplease.com/ipa/A0104721.html shows that manufacturing was 22.4% of employment (total including farms) in 1929, 29.35% in 1945, and 25.97% in 1950, 23.42% in 1970.
Broadly stated, the manufacturing moment for the U.S. ran from 1870 to around 1970. See http://statchatva.org/2012/04/06/occupation-change-1920-2010/ for a (somewhat crude) chart
23. August 2014 at 04:56
Peter, You said:
“Neoliberalism “hollows out” the tradable goods sector of an economy, trade deficits rise dramatically, governments respond by promoting bubbles in non-tradables (notably housing), debt (private and/or public) expands dramatically, and inevitably the economy crashes.”
That doesn’t seem to have happened in Singapore, or Hong Kong, or Taiwan, or Switzerland, or Germany, or the Netherlands, or the Nordic countries.
Elsewhere you suggest that Brazil and Bolivia are better examples of neoliberalism that Chile.
Perhaps the real problem here is that you and I define neoliberalism so differently that we are talking about completely different policy regimes, and hence are talking past each other. I’m talking about the kind of policy regimes that get rated highly on all the economic freedom indices, especially if you remove “size of government” from the index.
So let’s use different terms. We’ll call the policy regime in Chile and Switzerland the “apple” regime. We’ll call the policy regime in Bolivia and Brazil the “orange” regime. Can you and I agree that apple policy regimes are better than orange policy regimes? If so, I don’t care if you call the orange regime “neoliberal.” A rose by any other name . . .
24. August 2014 at 23:48
Peter Schaeffer: Australia as a political and economic entity is a creation of the British. Foragers don’t have capital and certainly don’t import or export it.
There seems to be a certain amount of talking past each other. When did services overtake manufacturing in total employment in the US?
Also, goods balance does not tell you whether a country is a capital importer or not, one needs the full current account balance. The US was fairly clearly an importer of capital in the C18th, C19th and early C20th. Just as it was an importer of labour. Hence scarce capital and scarce labour combining to force protection on exporting-land. (As also happened in the Antipodes.)
Conversely, in labour- and capital-exporting C19th Britain, labour and capital combined to force free trade on import-competing land. While in capital-importing, labour-exporting, Imperial Germany, capital and import-competing-land combined to force protection on labour.
On education premiums, my point is that if Gini-coefficients and education premiums are highly correlated, that suggests widespread disbelief that said premiums can be captured by one’s children might be operating. I.e. that the society is not regarded as meritocratic on the basis of educational effort. Even when the strong cultural priors of certain groups may demonstrate otherwise (such as Vietnamese immigrants).
25. August 2014 at 15:16
Peter Schaeffer: on current account deficits, what Scott said here:
http://www.themoneyillusion.com/?p=26140
Also, there might be reasons why Chinese capital looks for American (and Australian and Canadian …) places to go.
http://brontecapital.blogspot.com.au/2012/06/macroeconomics-of-chinese-kleptocracy.html
13. April 2015 at 11:20
Scott,
I think very few people pointed out to the difference in investment rates. It’s huge. China invests over 30% of GDP consistently, and Brazil is always below 20%, except during the military dictatorship, where rates approached 25% of GDP. Sometimes we get a spike in investment rate, driven mainly by foreign capital entry, but then the thing get reversed and our growth rate lowers again.
Our productivity is ridiculous, and refuse to grow faster. That’s a point to consider. But the key question is in understanding why we have such a low savings rate.