Tuesday, January 12, 2010

Europe: you guys know it's not a single country, right?

The latest debate in the blogosphere revolves around comparing the economic performance of the US relative to Europe. This is problematic, as people are not using a common metric or any real data analysis. Krugman has claimed that any superior US performance in growth is only due to increased population. 

Lets take a look at some actual numbers, shall we? These are from the total economy database started by Angus Maddison, and taken over by Groningen University and the Conference Board. I am using the Table for GDP per capita in 1990 US$ (converted at Geary Khamis PPPs).

In 1980, where this debate seems to start, we can see that all the European countries I've chosen were considerably poorer than the US except for Switzerland.

Below I list Per Capita GDP as a % of US Per Capita GDP for selected European countries in 1980 and 2008:

Austria   74.06    76.72
Denmark   81.96    78.82
France   81.31    72.91
Greece   48.29    52.33
Ireland   45.97    90.70
Italy   70.78    63.70
Neth    79.15    78.83
Norway   81.15    93.01
Portugal   43.30    46.07
Spain   49.53    55.62
Sweden   80.40    78.81
Switz   101.0    79.56
UK   69.61    76.47
Germany             66.34 (2008 only)

As one can see, the European experience is quite varied. Greece, Portugal and Spain have done a little bit better than the US over the period but are still extremely poor in comparison at roughly half of US per capita GDP in 2008. 

France and Italy have done notably worse than the US over the period and are at less than 75% of US per capita income. 

Austria, Denmark, the Netherlands and Sweden have basically performed about the same as the US over the period and remain at roughly 80% of US per capita income. 

Norway has done quite a bit better than the US over the period and is now above 90% of US per capita income. Ireland has done even better, going from around 50% of US income levels to 90% of the US over this period. The UK has also done better than the US in per capita growth but still has only reached about 3/4s of the US level of per-capita income. 

Germany at re-unification (1989) was at 69% of US levels and has fallen to 66% by 2008.

So, it's very misleading to talk about growth or wealth levels in "Europe" as if one number captured the European experience. Italy and France appear to be from different worlds than Norway and Ireland!

It is also not correct that US growth has been higher only due to population growth. Many European countries, including large ones like France, Germany and Italy have seen their per-capita incomes fall relative to the US since 1980.

And, while it is true that many European countries have had very similar per capita growth as the US since 1980, these countries generally are quite a bit poorer than the US by this metric at least and thus perhaps should not be too proud of only matching our growth rates (you know, convergence and all that). 

I hate to bring up neoclassical growth theory, but in the steady state of that model, all countries should grow at the same rate (in per capita terms). Differences in institutions or policies only result in permanent differences in income levels in the standard model. 

Finally, big ups to Ireland and Norway for their amazing economic performance over this 1980 - 2008 time period. Ireland I know, changed their economic institutions over this period, but I don't really know anything about Norway (well, they do have oil, right?)


Tim Worstall said...

Here in Europe we usually try and make finer grained distinctions.

Between Rhineland capitalism (Germany, Austria etc), Mediterranean (Portugal, Spain, Italy, Greece), Scandanavian and Anglo Saxon (UK, Ireland, maybe Holland to an extent).

The Scandanavians for example do indeed have high levels of redustribution: but they also tend not to have a minimum wage, almost no "job protection" (but high levels of unemployment pay and retraining allowances) and low capital taxes and high consumption taxes.

The Mediterraneans have very high levels of job protection (here in Portugal it's about high as trying to fire a UAW guy although not as bad as a New York City teacher), high capital taxation and high relative to average wages levels of minimum wage.

Really very different models.

Unknown said...

How useful is the neoclassical model in understanding growth? I learned it, but never really grasped it's significance.

Shawn said...

for reals on the props to Ireland. anyone know if that huge gdp growth has gone to a very small portion, or are middle class and poor doing 2x as well also?

I've had a couple conversations w/ some Irish (granted, bar conversations, but conversations nonetheless) following the decline in the explosive growth they experienced, and they were talking all protectionist and pro-union, making me think that the benefits of trade hadn't quite made it to the middle class, or at least been understood.

That Guy said...

Is the mean a good measure here considering we are talking about redistribution that attempts to lower variance.

Are there comparable numbers available for post tax median income and some sense of the skewness of the distributions.

I would go look myself but I have not yet recovered from the data sections of my dissertation.

Anonymous said...

I was in Ireland a couple of times in 2008 and 2009 and I can tell you they are not exactly having a big party there...

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Max said...

Well, on Ireland, they "bought" their economic performance on loans, which tanked when the economic tanked. Bad luck for them. However, when I compare Ireland in the late 80s and Ireland today, I'd say they have (had?!) now something resembling market economy. They freed up a lot of economic power by lowering tax rates, fe.

Norway has oil and a prudent spending policy. Actually Norway is fiscally sound (thous the Kronen is a very good anti-inflation investment) and they try very hard to only spend what they make. However, they still depend much on their oil richness. We will see how it goes when that runs out.

I am bit suprised by Denmark, isn't that the country that's supposed to be the best place in the world according to the UN. Then again economic indicators don't tell the truth about pleasantness to live in such a country (which is subsidized by the state in a big way in Europe - just think Light Rail!).

I'm a bit surprised by France relative to Germany, because the usual line goes that France is poorer than Germany (and that is true: income levels in France are lower (about 10k) and costs of living are higher (BIG VAT!!)). This model does seem to indicate something different.
It'd be nice to know how that fits

I am not a big fan of GDP, because f.e. France is a consumption-heavy country, while Germany is more prudent in that it SAVES A LOT!

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Life said...

Yeah , its not a single country but its the most favorite tourist destination for all of us and as we are going to have London 2012 Olympic Games in Europe only , the entire Europe will be on focus for not less than 3 months,and its a good time for all these countries to attract more and more tourist to their nation and improve their GDP.