1 Economic Miracles: Institutions and Growth Promoting Policies Victor Polterovich and Vladimir Popov New Economic School, Research Project 2007-2008 Assistant: Alexander Tonis 1. State of the Art If rapid economic growth in a particular country continues for several decades, it is usually described as economic miracle. The undisputed cases of economic miracles so far include Japan, South Korea, Taiwan, Singapore and Hong Kong – 5 East Asian countries that were still developing around 1950 and that became developed several decades later, effectively catching up with the Western countries in terms of per capita income and consumption. Quite often the term “economic miracle” is applied to other countries that exhibited very high rates of growth for several decades, but either started from a rather high base (postwar Germany and Italy, more recently – Ireland and Norway), so were classified as developed countries before, or started from a very low base (Botswana, Malaysia, China, etc,) and are still classified as developing countries. Finally, often small oil rich countries (Brunei, Equatorial Guinea, Oman, Qatar, Trinidad and Tobago, UAE) that managed to increase their per capita income as a result of the favorable shifts in the terms of trade (increase in oil prices) are also labeled as “economic miracles”, but we do not consider these cases, unless the improvement in the terms of trade was associated with the considerable acceleration of growth. In a sense, the general picture of miracle “dynamics” is similar in different countries. Consider several examples. “Spanish miracle” (1959-73) – in 1959 Spanish GDP per capita constituted 30% USA level. In 1974 it was already 56%. Afterwards, the catching up process stopped. In 1994, the relative Spanish GDP per capita level was the same as in 1974. In 2005 it was equal to 61.5% 1 . Portugal experienced high economic growth in 1959-1973 as well. This country started from a GDP per capita level of 26% relative to the USA and reached about 46% in 1973. In 1994 and 2005 the figures were 49% and 47% respectively. For Japan the figure were as follows: in 1950 – 20%., in 1983 -76%, in 1991 -90%, in 2005 - 75% of the USA GNI per capita level. In 1962 Korean GDP per capita was just 11.4% USA level. In 1992 it raised up to 46%. Afterwards the catching up speed diminished drastically. In 2005 Korean GNI per capita reached 52% USA level. Nam (1995, p.159) writes that “real GDP of Korea has increased more than 18- fold during the 1962-91 period, with an average annual growth rate of 10.6 percent. This contrasts with an average growth rate of 3.6 percent during the earlier…period of 1954-62”. In 1994, when fast growth suddenly started in Ireland, its GDP per capita was almost the same as in Spain, about 56% USA level. In 2005 it reached 83%, more than one third higher than in Spain. Thus one can see that in most cases miracle-type catching up dynamics follows a similar pattern: a shock-wise start, a very fast development, coming to a halt at a certain point.. What are the mechanisms determining this pattern? This pattern can be described as a quick transition from one equilibrium trajectory to another in a system where the multiplicity of equilibria takes place. There is a number of economic models 1 All figures for 2005 are relative GNI that is very close to relative GNP.