Determinants of Economic Growth. - book review

Public Interest, Fall, 1997 by Irwin M. Stelzer

IRWIN M. STELZER

Computers are the opiate of the economist masses. Because it is now so cheap to "crunch" huge volumes of data, economists can devise elaborate equations and plug in millions of numbers with ease. They can also produce publishable material, which is so much more important than old-fashioned, good teaching in determining who receives the coveted tenure that forever relieves academic economists from reliance on market forces for their livelihoods. No need to determine whether the data accurately represent what they purport to represent; no need to ask a question of any interest to practical men of affairs or to policy makers. And certainly no need to make the results intelligible to all save a few colleagues.

Fortunately, Harvard economics professor Robert Barro is better than that. He starts Determinants of Economic Growth(*) with an important question, one posed over 200 years ago by Adam Smith: What determines the long-term economic growth rate, and therefore the prosperity of nations? He then proceeds to test a variety of theories, using such data bases as exist for over 100 countries, always carefully explaining their weaknesses and devising alternative tests of conclusions reached on the basis of those data that are particularly imperfect. Above all, he manages to include sufficient statistical and technical detail to satisfy the professionally trained while, at the same time, setting forth his major findings in prose accessible to the interested layman.

The three parts of this slim volume follow the format of Barro's 1995-1996 Lionel Robbins Memorial Lectures at the London School of Economics. The first chapter tests various theories of economic growth to find what corporate gurus now like to call "the drivers"; the second details the interplay between economic development and democracy; the final chapter explores the relationship between inflation and monetary policy on the one hand and economic growth on the other.

Some of Barro's findings are unsurprising: The number of years of secondary and higher-level schooling of males aged 25 and over has a significant positive effect on growth rates, supporting theories that stress the importance of education to an economy's ability to absorb new technologies. But some are surprising indeed: Data for 114 countries "do not support the hypothesis that education of women is a key to economic growth," either directly or through its effect on fertility rates.

Barro's regression equations also turn up proofs of beliefs long intuited by conservatives. It seems that the higher the ratio of government consumption (excluding expenditures on education and defense) to a nation's gross domestic product, the lower will be its rate of growth. As Barro puts it, "Big government is bad for growth." But the rule of law, as measured by such factors as the risk of government expropriation, the sanctity of contracts, and the security of property rights, has a significant positive effect on growth: "Greater maintenance of the rule of law is favorable to growth."

Barro then adds a bit of dash to this analysis. Of the 86 countries for which there are adequate data, he predicts which are likely to grow fastest, and which slowest, between 1996 and 2000. The average forecast growth rate for all 86 countries is 2.4 percent per year; the five likely to grow fastest - because of their combination of human capital, education, low government spending, robust rule of law, and other key variables - are South Korea, Philippines, Dominican Republic, India, and Poland; the laggards, all expected to exhibit negative growth, are Sierra Leone, Sudan, Malawi, Bangladesh, Niger, and Zaire. The United States is predicted to grow at an average annual rate of 1.4 percent, well below Asia (3.7 percent) and Latin America (2.9 percent).

Barro may be too pessimistic in respect to America. He argues that our institutions and policies "are already reasonably good (despite possible excesses of transfer programs and regulations)," making it unlikely that changes in those institutions and policies can raise our growth rate much above 2 percent. Anything higher "seems to be incompatible with the prosperity that has already been attained." America's new triumphalists are as wrong in predicting continued, uninterrupted economic growth as the declinists were a few years ago in forecasting an America doomed to steady decline. But it does seem that efficiencies forced on industry - by Michael Milken and his so-called army of predators, by globalization of labor and product markets, and by deregulation of transport, financial services, telecoms, natural gas, and (soon) electricity - are permitting us to grow more rapidly, without triggering inflation, than we once could. Perhaps when Barro revisits these lectures, he will take a happier view of the effects of deregulation on efficiency and of our new-found ability to cope with the excesses of income-transfer programs. Perhaps he will even raise his projection of U.S. growth a notch or two.