PART I
The Proximate Sources of Growth
in the Modern World Economy
since 1950
Economic growth – or the lack of it – happens as a result of the millions of day-
to-day decisions made by individuals in households, firms and governments.
Individuals decide whether to go to work, to take time off, to be a househus-
band/wife, or to go travelling; when at work they decide how much effort to
expend. Firms rake in profits and decide whether to utilize that surplus to boost
ex ecutive pay, to return money to shareholders in the form of dividends or to
invest in extra capacity to expand production in the future. ‘Good’ govern-
ments may make decisions that directly promote economic growth, through
investing in new transport links and agreeing international trade treaties to
expand market access, or do so indirectly by re-training workers to use new
technologies or reducing interest rates to make it cheaper for firms to borrow
from banks to invest in new machinery. The decisions of ‘bad’ governments
may undermine economic growth, encouraging a debt-fuelled boom in
consumption at the expense of investment in the run-up to an election, appoint-
ing teachers to reward political supporters rather than to provide pupils with
motivated professionals, or squeezing resources from high taxation of the
private sector so that the President can live in luxury.
Those millions of decisions can be grouped into those related to investment,
to land,to labour and to productivity, each of which is a proximate determinant
of economic growth. They have promoted sustained long-term growth in some
parts of the world and not in others, and their impact can be measured in terms
of economic growth, the focus of Part I of this book. Growth is about how aver-
age incomes or material living standards change over time. The first and key
conceptual chapter defines gross domestic and gross national product
(GDP/GNP). Once we measure economic growth we can illuminate the nature
and origin of global income inequalities. The chapter questions the assumption
that economic growth can always be considered to represent progress: how, for
example, do poverty, nutritional standards and environmental quality change
with economic growth? Chapter 2 examines growth in the modern world econ-
omy, looking at the patterns of convergence and divergence in global income
distribution, and the growth miracles and failures that have characterized the
world economy since 1950. Why, for example, was per capita GDP growth in
Angola 11.4 per cent, New Zealand 1.1 per cent and Zimbabwe –5.4 per cent
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