The Stagnation Of Nations

Listener: 16 November, 1985

Keywords: Political Economy & History;

What determines the comparative growth performances of different economies? Some will tell you that it is the amount of labour and capital together, perhaps, with the technologies that are used. Mancur Olson provides a quite different explanation in his The Rise and Fall of Nations: Economic Growth, Stagflation and Social Rigidities. The essence of his argument is that interest groups are often (or usually?) growth-retarding, so that as they become more influential, the growth rate of that economy slows down in comparison to ‘younger’ societies.

Before I explain his thesis, let me offer Olson’s most spectacular illustration. He compares the current growth performance of each of the states of the United States of America, and finds that the most recently established ones grow faster than the old established states. He argues that well-established states have well-established pressure groups, and that if these increasingly influential groups operate to slow down the growth process, then we would expect the .slower growth that Olson observes. Now, there is an anomaly to his observation: the southern states are growing faster than the theory seems to predict. However: Olson points out that they suffered a defeat in the Civil War, just over 100 years ago. Such a defeat was likely to destroy the established pressure groups. Olson finds that the current growth performance of the southern states can be explained by their reestablishment after the Civil War, rather than by their original foundation date.

The impressive economic performance by Germany and Japan after defeat in World War II could be similarly explained. In the same spirit, the British magazine Economist pointed out that after the war all the German managers were jailed, and it was only the robust ones that returned to managing very successfully. (This theory has not had a lot of popularity, implying as it does that we should regularly jail our managers, and union leaders.)

Why does Olson think pressure groups are growth-retarding? The essence of his theory is that they aim to improve the lot of their members by attempting to redistribute income in their favour. However, in doing this they inhibit the growth process by distorting the efficient allocation of resources. Olson uses economic theory to explain how this happens, but most people believe it anyway. How many times do we accuse business, the farmers, the public service, retailers, unions or whoever of serving their own interests at the expense of economic performance?

Olson pays little attention to New Zealand, but it is interesting to apply his theory to our experience. First, it is difficult to decide when New Zealand ‘starts’ in terms of the creation of its pressure-group structure. Let me tentatively suggest that the crucial year is 1938, although it could be set as early as, say, 1840. However, it is plausible to argue that a number of changes about 1938 generated a new economic structure. An obvious example is that import licensing stimulated a new manufacturing sector.

Initially, according to the Olson theory, this would have released a lot of energy directed towards achieving economic performance. However, as time went on, as the new entrepreneurs became tired, or were replaced by their children, pressure groups would have reformed and become increasingly more efficient at lobbying and pursuing distributional goals.

My guess is that by about the 1960s the politics of the pressure-group economy had taken over. Such an economy was able to cope, giving a modest economic performance providing the world economy remained benign. However, from the late 1960s world circumstances changed, at which point the pressure-group economy became a stagnant economy.

What are the future growth implications? I do not think that we have had a shattering of the pressure-group structure in recent years. However, there have been some important changes. For instance manufacturers have become less inward-looking, with more becoming involved in exporting. Indeed the whole economy has become more outward looking, and it may be that the pressure groups recognise that internal politicking is no longer a sufficient means of solving their problems, since the issues increasingly call for off-shore solutions which are not totally in the hands of our government. Or am I being over-optimistic?