The Stages of Economic Growth Revisited

Timothy J. Kehoe, Consultant

March 2016 | Federal Reserve Bank of Minneapolis Economic Policy Paper 16-5 | With Daniela Costa and Gajen Raveendranathan
Part 1: A General Framework and Taking Off into Growth

We propose a theory for classifying countries according to their stages of growth and for analyzing the determinants of growth in and between the different stages.

We conclude that, even if they have inefficient institutions and policies, poorer countries can achieve rapid growth by adopting the technologies and managerial practices of countries like the United States. As they become richer, however, their growth rates will decline unless these countries have efficient institutions and policies. For many countries, this requires that they undertake serious institutional and policy reforms.

Our analysis further suggests that world economic leadership is unlikely to be provided by less-developed countries like China.

Part 2: Catching Up to and Joining the Economic Leader
April 2016 | Federal Reserve Bank of Minneapolis Economic Policy Paper 16-6 | With Daniela Costa and Gajen Raveendranathan

Rostow (1960) hypothesized that taking off into economic growth was a difficult task for countries in the 19th century, requiring major changes in institutions. In the 20th century, however, as the United States and other advanced countries became richer because of improvements in technologies and managerial practices, it became easier for poor countries to take off into rapid growth by adopting some of these improvements.

We hypothesize that, while taking off is now easier, the difficult transition is now from take-off to catch-up, where nations grow closer to the economic leader (now the United States). Doing so often requires major reforms in policies and institutions. Data suggest that when countries reach the limits imposed by their policies and institutions, their growth slows sharply. Even countries like Japan that have joined the United States in economic leadership in defining best practice in some sectors lag behind in other sectors. Our theory suggests that China is currently reaching its limits to rapid growth.