Keir Starmer became Prime Minister of the United Kingdom promising to revive economic growth. Less than two years later, his approval ratings have plummeted and his departure from office seems almost a fait accompli. One reason for its political problems (there are many) is that the British economy never took off.
Politicians like to pretend that they control the levers of economic growth. But, as Starmer’s decline in popularity demonstrates, that claim has become increasingly less credible.
Those who call themselves development economists, on the other hand, do not even pretend to know the fundamental causes of growth. A quarter of a century ago they decided that the puzzle of why some countries become rich while others remain poor was too complex to address.
If you give a chicken or a pig to the inhabitants of a village, will they be less poor two years later? If children are dewormed, will they do better in school? Those are the kinds of questions that have occupied some of the brightest minds in the development field. As Lant Pritchett, a visiting professor at the London School of Economics, has long argued, this is a huge misallocation of talent.
While some economists dithered, countries and their leaders have been busy trying things out. The results have been mixed.
In 1978, then-Chinese leader Deng Xiaoping launched his “reform and opening-up” policy, resulting in the fastest economic growth in human history. Since then, the inflation-adjusted income of the average Chinese citizen has increased 20-fold and hundreds of millions of people have been lifted out of poverty.
Thirty-five years ago, another demographic giant, India, also embarked on a reform process. The results have been less spectacular than those of China, but equally impressive: the average Indian today enjoys an inflation-adjusted income almost five times what it was in 1991.
India and China are not alone. Other countries—including Vietnam, Bangladesh, Poland and Turkey—have grown rapidly in recent decades. But many more countries have stagnated during the same period.
For example, Brazil and Mexico also stabilized and opened their economies (Brazil to a lesser extent than Mexico) in the 1990s, but growth has been weak. China has surpassed both in income per person, although it started out much, much poorer.
Anecdotal evidence can be made more systematic. A recent study shows that comprehensive economic policy reforms often precede growth accelerations. However, the vast majority of these reforms do not produce any acceleration of growth. A good policy is necessary. It is rarely enough.
If that seems frustrating, it should.
But all is not lost. Another group of economists—including Nobel Prize winner Philippe Aghion—has provided some clues to solving the mystery of growth. The key lies in productivity improvements, which in the long term only result from technological innovation.
Innovation, in turn, requires what economists call rents: extraordinarily high benefits that more than offset the costs of innovators. But if those rents are too large, established companies will be tempted to use their economic and political power to stifle innovation from potential competitors. This is a delicate balance that few countries manage to achieve.
Companies in developing countries rarely do the cutting-edge innovation that would give rise to the next Google or Anthropic. For them, the key is to adopt and adapt technologies invented elsewhere. But this task is also proving surprisingly difficult.
Developing countries have made enormous progress in many of the factors that drive growth. Educational levels have increased. Life expectancy has improved. Investment rates have increased. In many countries, institutions are stronger than a generation ago. However, income convergence with advanced economies has been painfully slow and, in most cases, non-existent.
The only plausible explanation for this enigma lies in the slow diffusion of technology, as Harvard’s Ricardo Hausmann has argued. Ideas can cross borders instantly, but productive capabilities cannot. I can easily download engineering manuals from the internet. But reading them doesn’t make me an engineer. I cannot be trusted to build a bridge unless I have spent years surrounded by engineers, acquiring and applying the necessary knowledge.
Furthermore, productive capacities tend to be specific to a single sector. And they are not developed unless a demand arises for them within that sector. Luthiers exist only in countries that have a violin industry.
This has implications for public policy. Markets alone may not generate the capabilities necessary for technological modernization. Governments must coordinate investments, provide sector-specific public goods and specialized training, and create an environment where innovation is rewarded without allowing established companies to block competition.
Solving the puzzle of why some countries get richer while others stagnate is difficult. But so is curing cancer. That hasn’t stopped biologists, research chemists, geneticists and doctors from trying. They have made progress, although slow.
Economists have also made progress, although even more slowly. But they can keep moving forward as long as they focus on the right problems. The challenge, as Pritchett says, is to bring people “into productivity.” The complexity of this challenge can be frustrating. But it’s less frustrating than continuing to read academic articles about chickens and pigs while billions of people continue to live in poverty.
Andrés Velasco, former Minister of Finance of Chile, is dean of the School of Public Policy at the London School of Economics and Political Science.
