October 26, 2007
Is Europe really that sclerotic? Lessons from IMF statistics
The general perception about the relative merits of the US economy on the one hand and the continental European economies on the other hand is simple: The US is a very dynamic economy which has been growing briskly over the past decade while Europe is sclerotic and always lagging behind. While markets in the US are free to allow for a swift process of innovation and growth, overregulation and a large government sector in Europe keeps growth down.
Against these stereotypes, the latest statistics from the International Monetary Fund’s latest World Economic Outlook are highly interesting (see the whole publication here or the tables referred to in this post here): After a number of downward revisions of the US GDP data over the past years by the Bureau of Economic Analysis, the data just does not support this impression anymore. If it comes to growth in real GDP per capita, arguably the single most important indicator if one wants to measure how well an economic systems manages to improve the welfare of its citizens, the US has been growing more slowly than the Eurozone economy over the past decade.
According to the IMF figures (table B1), the US economy has produced a real per capita GDP growth of an average of 1.6 percent per year over the period 1999 to 2008 while the Euro economy has produced a real per capita GDP growth of an average of 1.8 percent per year. Interestingly, even Germany which hovered around stagnation for several years at the beginning of the decade, has reached a per-capita-growth rate of 1.5 percent per year, only slightly below that of the US.
But where do these surprising figures come from? Did not the US economy outperform the European one in most of the years in question? The first reason is that European population is growing much slower than the American one. German population is stagnating, so a headline economic growth of 2 percent at once translates into a per-capita-growth rate of 2 percent. The US population is growing, so part of the economic growth is just needed to keep per-capita incomes from falling.
A second reason is that American statisticians tend to overestimate growth in their first estimations while European (and especially German) statisticians have a clear tendency to underestimate growth in the first publications of GDP data. The later revisions are often not given as much coverage in the news as the first publications.
But the data holds a wider lesson as well: Obviously, capitalism is a much more resilient system than some of the critics of the European economies implicitly suggest. Even with distortions, regulations and frictions as they exist in Europe, a free-market system can still produce decent rates of growth. And, yes, there seem to be different varieties of capitalism that work. Not everyone has to chose the same variety, and it might not be as clear as some people think which variety suits a country best.
Comments(4)
Sebastian – great to see that you get the message out! I completely agree with you on the fundamental argument that GDP/capita is more important than just GDP… “grandeur” in the world is not really that interesting!
In fact, what I would suggest as is to take not GDP/capita, but rather take the rate of change in real gross national income (GNI), i.e. GDP adjusted for income transfers from the rest of the world. This allows you to “adjust” for the constant massive US trade deficits (admittedly in welfare terms an ambiguous in fact) and in fact gives an even more remarkable result…..the data is not quite as up-to-date as GDP, but US real GNI per capita growth in recent years has been lower than almost all Euro-zone members.
I’m not sure that the Eurozone number says what you think it says. The eurozone includes quite a few former communist regimes that are still “emerging”. Being as they are working from a lower level of resource utilization their rate of growth is going to be faster than a mature developed economy. Take out “emerging Europe” and I’d wager “Western Europe” is in the vicinity of France and Germany (I bet an “asiazone” index is outperforming Japan as well). I’m not knocking Europe, it’s not a bad trade to give up a little growth to get a better quality of life, but I don’t think the numbers prove that the mature European economies are whipping the United States at its own game.
@Don:
In fact, the euro-area does yet not contain many former communist country. In fact, so far, only tiny Slovenia is a member and that country is too small to make any sizable impact on EMU growth. All the other fast-growing countries in Central and Eastern are member of the EU, but not of the euro-area.
The important point is that even France and Germany, the core countries of EMU, have been growing almost as fast as the US in per-capita terms.
[...] IS EUROPE REALLY THAT SCLEROTIC? LESSONS FROM IMF STATISTICS Annotated According to the IMF figures (table B1), the US economy has produced a real per capita GDP growth of an average of 1.6 percent per year over the period 1999 to 2008 while the Euro economy has produced a real per capita GDP growth of an average of 1.8 percent per year. Interestingly, even Germany which hovered around stagnation for several years at the beginning of the decade, has reached a per-capita-growth rate of 1.5 percent per year, only slightly below that of the US. (Še brez glasov) Loading … [...]