A RECENT World Bank study shows that countries’ economic growth rates are highly volatile due to the presence of “luck”—shocks such as shifts in terms of trade. But effective short- and long-term policies can help offset the effects of bad luck and create economic success stories.
The economic “miracles” of the postwar era—Japan, Germany, and the Four Tigers of East Asia—have been justly celebrated. Their success has been the subject of much study by analysts eager not just to explain the rapid growth rates but to apply these explanations to other countries.
Many analysts have held to the implicit assumption that differences in economic growth rates among countries are relatively permanent, with the same countries performing well decade after decade. This assumption has led to generalized explanations that attribute the success of the postwar economic miracles to durable country characteristics: institutional arrangements such as the lifelong employment common in Japan’s labor market, traditions such as government-business consultations in the Republic of Korea, and even cultural tendencies, such as the German penchant for quality.
But the realities of economic growth contradict the assumption that differences in growth rates remain stable over time; economic success (or failure) is typically shortlived. With some exceptions—notably the countries mentioned above—the same countries do not perform well over long periods. A country’s performance may be outstanding one decade but a disappointment the next, and vice versa. There is a surprisingly large volatile element—transitory “booms” and “busts”—that has a significant effect on growth rates over periods of a decade or more. This volatile element, which can be described simply as “luck,” includes internal shocks, such as droughts, as well as external shocks, such as sudden shifts in terms of trade.
But the presence of this volatile element does not imply that luck is the most important factor in economic success. A country may have the good luck to avoid negative shocks, but without good policy, it will turn in only a mediocre performance. Similarly, a combination of poor luck and poor policy can turn what should have been mere tremors into full- fledged shocks. For despite the presence of luck, established policies have an appreciable effect on economic growth rates and help to explain why some countries are able to sustain growth and others are not.