INDEPENDENCE DAY AND THE RULE OF 72

The 4th of July is Independence Day in the USA, and may it be a happy day for any readers out there.

The Declaration of Independence was signed in 1776, and for some reason the anniversary started me thinking about the rule of 72. As you will remember, the rate of economic growth times the period needed to double income equals 72.

Thus, if per capita GDP grows at an average of:
· one percent per year, per capita GDP doubles every 72 years;
· two percent per year, per capita GDP doubles every 36 years;
· three percent per year, per capita GDP doubles every 28 years.

The miracle of compounding means that over a period of 216 years, just under the lifetime of the United States, if per capita GDP grows at an average of:
· one percent per year, per capita GDP increases by a factor of 8;
· two percent per year, per capita GDP increases by a factor of 64;
· three percent per year, per capita GDP increases by a factor of 512.

Clearly, increasing annual per capita economic growth by one or two percent per year, and sustaining that increase for long periods of time is the key to economic development. All you need it save a little more, study a little more, organize a little better, and do things a little better. Eliminating impediments which cut into a country’s GDP by even a small amount may be significant steps in promoting long term growth. But the general agreement seems to be that organizing better and working smarter is even more important than strengthening physical and human capital for long term growth.

I have lived and worked most of my life in the world's richest countries. I am pretty sure we are nowhere near the frontiers of organizing as well as we might or working as smart as we could.

Failing to use a portion of a country’s human resources would appear likely to cut back on the rate of per capita growth. Clearly the very young and the very old don’t participate in the workforce. But many countries leave much more of the population out of the workforce. But it seems that most developed countries look back on their demographic transitions, when dependency ratios declined and more of the population was in the workforce as critical times in their development takeoff.

In countries with lots of people who can't find jobs, and lots of people who can't find jobs that fully occupy their time or abilities, I suspect the problem gets harder. Those who are working have not only to keep everyone else going, but the full burden of saving, educating themselves, reorganizing and doing things better falls on them too. There are limits! Poor countries often have a lot of unemployment and of underemployment. Putting people to work seems the obvious first step for them.

Poor health causes workers to miss days of work, and to work less efficiently when they are at work, and rates of illness are high in developing nations. The consequence of a history of poor nutrition and poor health is often physical disability, and rates of physical disability are high in developing nations. Disabilities that are technologically compensated in the developed world, such as poor eyesight or hearing, are often uncompensated in poor countries.

Accidents are a bigger problem than is commonly recognized. I remember a study some years ago that put the annual cost of vehicular accidents in Costa Rica at more than three percent of GDP.

Prejudice in countries limits the economic participations of the victims of that prejudice. If one looks at caste prejudice in India, tribal prejudice in Africa, or ethnic prejudices in other nations, it seems likely that these may reduce GDP significantly.

Gender discrimination limits the economic contributions of women in all countries, and limits that contribution greatly in some. Bernard Lewis in his books "What Went Wrong? : The Clash Between Islam and Modernity in the Middle East" and "The Crisis of Islam: Holy War and Unholy Terror" hypothesizes that the limited economic roles possible for women in Islamic society is a significant factor in the lagging development of Islamic countries.

The Washington Post today features an article on the World Bank’s efforts to reduce corruption in developing nations. I can easily imagine crime and corruption as easily causing a few percentage point reduction in GDP.

And of course, this explains why good policies and good institutions, maintained over time, result in rich countries!