by Andrew

More on the Manchurian Recession

Jane Perlez has a nice piece in the New York Times reporting on the woes of a remote coal town in Heilongjiang province. After a long time out of the media spotlight, China’s northeast is certainly getting its share of coverage lately (see previous examples here and here) thanks to its position as the epicenter of the country’s industrial slowdown.

The mine’s owner, the Longmay Group, the biggest coal company in northeastern China, announced in September that it planned to lay off 100,000 workers. The elimination of about 40 percent of the work force at 42 mines in four cities is the biggest reduction in jobs that anyone could recall in this steadily declining rust belt near the Russian border.

China has managed mass layoffs at creaky, state-owned businesses like Longmay before, averting the threat of strikes and unrest by suppressing protests and offering payouts and job training.

But that was when the economy was booming and could readily absorb displaced workers. The test the government now faces in this depressed coal town and in other hard-hit areas across the country is whether it can head off labor discontent in a slowing economy.

Longmay has so far delayed the bulk of the layoffs, cutting only several hundred older workers who held nonessential jobs. Last month, the government of Heilongjiang Province, which owns Longmay, announced a $600 million bailout that would help the company repay its bonds. But analysts see the infusion as short-term relief that will not prevent the inevitable reckoning.

The coal industry is hurting nationwide, as coal prices have fallen nearly 60 percent since 2011, said Deng Shun, an analyst at ICIS C1 Energy, a consultancy based in Shanghai. And Longmay, he said, produces far less coal with extra workers than newer, more efficient companies.

“They are quite worried about social unrest, so they delay,” he said. “These layoffs should have happened two years ago.”

The piece focuses on the potential labor market impacts of layoffs at coal mines and other troubled industries. While the coal industry has been shedding jobs over the past couple of years, mines have also tried to minimize layoffs by cutting wages and working hours. But given the catastrophic financial condition of many coal mines, it’s unclear how long these measures can be sustained. A lot of this depends on how much help local governments give, and one way to interpret the unusual public announcements of large layoffs is as a strategy for the mines to pressure the authorities for more financial support (which Longmay received, as noted above). Still, the general view that the future will hold more layoffs rather than fewer is hard to argue with.

coal-jobs

Some of the concerns about the impact of these layoffs come from what the Harvard sociologist Martin Whyte called “the myth of the social volcano” (which he attacked in a book of the same name): the idea that Chinese society is rumbling pool of discontent that will erupt as soon as they run out of the opiate of economic growth. While I do think we are going to see things get worse in China’s labor market, and that things could get very tough in places like Heilongjiang, I really don’t think the result is likely to be mass protests, endemic violence or whatever it is people mean by “social unrest.” For one thing, the informal support networks in Chinese society are much stronger in my experience than in, for instance, America (which is having its own epidemic of social unrest at the moment). For another, the country went through a much more serious round of labor market stress starting in the late 1990s, when tens of millions of people were laid off from state-owned enterprises in every sector, without experiencing mass unrest.

SOE-layoffs

by Andrew

The best music I heard in 2015

This is a list of my favorites among all the recordings I heard for the first time this year, not of things commercially released in 2015 (same rules as my books list). I commend you to Ted Gioia’s best of 2015 list for something more current; the list below is purely a product of my own idiosyncratic listening habits. Unsurprisingly, it’s heavy on the jazz, but I have a few other things in there to mix it up. Alphabetical by artist:

  • Henry “Red” Allen – World On A String. One of the definitive statements of swing era jazz, never mind that it was recorded in 1957 rather than 1937. Incredibly creative solos from Allen and collaborators, including Coleman Hawkins and Buster Bailey.
  • Gary Clark, Jr. – Live. A charming young man with a straight-up monstrous guitar sound; while his studio records feel a bit overproduced, this bluesy live setting is ideal. The ghost of Hendrix is definitely hovering nearby, but he would be smiling I think.
  • The Gladiators – Studio One Singles. A long string of roots reggae classics; this collection is more consistent than either their album Trenchtown Mix Up, or the other widely-available collection Bongo Red.
  • Ice Cube – Death Certificate. When the NWA movie came out this year I went back to the records, and the truth is that NWA’s songs don’t hold up that well these days. Ice Cube’s solo stuff really does, however. And somehow I missed this one the first time around: funky, slamming production and hard-hitting rhymes.
  • Andrew Jaume – Merapi. A French jazz saxophonist and guitarist improvise with a Javanese gamelan orchestra in a rare but successful mixing of the traditions. A completely ravishing sound; I had been waiting for this album, without knowing it, for years.
  • Thelonious Monk – Big Band And Quartet In Concert. Despite having been a Monk fan for many years, I am still discovering great recordings: the long, complex big band arrangements are unique and wonderful, and the quartet statements are definitive.
  • Tiny Parham – 1928-1930. An unjustly neglected figure of 1920s jazz, Parham’s complex arrangements draw on the same well of exotic “jungle” effects as early Ellington.
  • Ernest Ranglin – Jazz Jamaica From The Workshop. A 1962 session featuring several Jamaican giants playing not instrumental reggae but  proper jazz. The guitar virtuoso Ernest Ranglin is the star; he would go on to fruitfully combine jazz with reggae on albums like Memories of Barber Mack, which I also enjoyed a lot.
  • Moacir Santos – Coisas. Wonderful jazzy miniatures by a largish ensemble led by the Brazilian composer, from 1965. Far superior to his 1970s outings on Blue Note.
  • Sly Stone – I’m Just Like You: Sly’s Stone Flower 1969-70. The mellow, minimalist funk of Fresh-era Sly Stone is one of the great sounds in pop music. This collection of singles is like discovering a whole new Sly album from that crucial period; essential.
  • Taumbu – Encantado. My most random musical discovery of the year (heard it on the radio in Mexico), a really lovely and creative album of Latin jazz.
  • Lucky Thompson – Tricotism. Thompson is one of my favorite tenor saxophonists, with a flat-out gorgeous sound. This classic session features him with minimal accompaniment, the better to showcase his tone.
  • Hozan Yamamoto – Ginkai (Silver World). A Japanese shakuhachi master joins a jazz group for an atmospheric mixing of the traditions. Obscure but worth searching out.

For reference, here’s a link to my 2014 music list.

by Andrew

What will China do about its zombie companies?

One of the more interesting developments in official Chinese discussions about the economy has been the appearance of the term “zombie companies”; Premier Li Keqiang himself has repeatedly used the term. It’s a loose shorthand for a problem that everyone knows about but is difficult to precisely define: money-losing companies that seem to stay alive far longer than economic fundamentals warrant. This problem is particularly acute in the commodity sectors: a global supply glut has driven down prices of iron ore and coal to multi-year lows, levels where China’s relatively low-quality and high-cost mines have difficulty being competitive. And yet they continue operating despite losing money, because it is easier to keep producing than to completely shut down. An excellent story this week in the China Economic Times on the woes of the coal heartland of Shanxi quoted one executive saying, “If we produce a ton of coal, we lose a hundred yuan. If we don’t produce, we lose even more.”

The incentive problem is very clear. If many companies shut down, output would fall and prices would rise, and the remaining companies would be more profitable. However every company wants to be one of the companies that is left standing rather than one of the companies that shuts down, and so they do everything they can to continue operating. They can also usually count on help from banks and local governments, who want to avoid the financial and social impact of a large employer closing. This is why there are increasing calls for the central government to break the logjam and organize the closure of excess capacity that market mechanisms should be producing. Indeed, I translated on this blog a very interesting proposal from the State Council’s Development Research Center on how to do exactly that.

The fact that top leaders are now talking openly about zombie companies could indicate some progress on this issue. So here’s another relevant translation: a recent interview with Feng Fei, a senior industrial official. Feng is also one of China’s top scholars of industrial policy, and in fact spent many years at the DRC. In October he was elevated to one of the vice-minister jobs at the Ministry of Industry and Information Technology, which has bureaucratic responsibility for most of the sectors with lots of zombie companies. His interview with Caijing magazine is short but to the point. He diagnoses the problem and its consequences very clearly, but hedges a bit when asked what the government is going to do. However he seems to indicate that the current preference is to deal with zombie companies by encouraging stronger companies to take them over–which I think is not as good a solution as the one the DRC has already proposed.

Reporter: Why is the exit of “zombie companies” being discussed now? What is the background to this question?

Feng Fei: There is not yet a consensus view about “zombie companies.” My understanding is that “zombie companies” refer to companies that have been losing money for a long time, and which have no hope of turning around or smoothly exiting the market. Currently the problem of “zombie companies” is very prominent, and this is related to three major issues in the economy.

First, China’s economic growth has entered a “new normal.” Downward pressure on the economy has increased, and the external environment for business is getting tougher. There are some companies whose technology, management and so forth are relatively poor, and who are finding it difficult to adapt to the new situation and to market changes, and as a result have fallen into serious trouble.

Second, there is serious excess capacity in some industries, resulting in a continuous decline in product prices and a fall in corporate profits. There are some sectors in which all companies are losing money, and operations are very difficult. For instance, in the third quarter of this year, the steel industry’s profit margin on sales was only 0.05%, and the sector’s total profits declined 97.5%; nearly half of the companies in the sector are loss-making.

Third, the market system is not robust: there are still some institutional obstacles that result in “zombie companies” finding it difficult to exit according to market rules.

Reporter: In more specific terms, what harm do “zombie companies” bring to China’s economy?

Feng Fei: The existence of a large number of “zombie companies” hinders China’s economic transformation and the upgrading of its industrial structure, and also increases macroeconomic risks.

First, these companies are holding on to a lot of resources, hindering the effective resolution of excess capacity. “Zombie companies” have low profitability, but take up a lot of land, capital, energy, labor and other resources, and prevent these resources from flowing to more profitable sectors, resulting in a serious waste of resources. You could even say that if “zombie companies” do not exit the market, the problem of excess capacity cannot be fundamentally solved, and it will be very difficult to achieve structural adjustment and industrial upgrading. Only if enough companies exit will there be enough companies entering.

Second, it undermines the market principle of survival of the fittest. Because of social stability considerations and other issues, there are efforts to preserve “zombie companies” and give them blood transfusions. This results in unfair competition, and could even cause a Gresham’s Law phenomenon [in which the bad drives out the good].

Third, it may lead to financial risks. “Zombie companies” have a lot of debt, which if not dealt with in a timely manner will result in an increase in banks’ non-performing loans. When you add in the complex chain of inter-enterprise debt, the problem becomes serious, and could lead to systemic risk. Therefore the State Council is paying great attention to this issue, and has required [us] to handle the “zombie companies” issue.

Reporter: If it is so urgent for “zombie companies” to exit the market, why has this been a difficult issue for so long? Why is it hard to establish a mechanism for market exit?

Feng Fei: “Zombie companies” can be dealt with in two ways, through market-oriented mergers and restructuring, or bankruptcy according to law. The handling of “zombie companies” will be more through restructuring, and less through bankruptcy, and will also ensure social stability. In terms of these methods, China has considered the design of the system, but has faced some difficulties and problems in terms of actual operation, and a complete system for market exit has not yet been formed.

First, in the restructuring and bankruptcy processes, there are difficulties with the placement of workers, the debt burden, and historical issues, which increase the cost of restructurings and bankruptcies. This is an obstacle to “zombie companies” exiting the market.

Second, some local governments interfere in the normal process of bankruptcy and market exit because of considerations related to preserving jobs, maintaining social stability, or the worries of banks and other creditors about bad debts.

Third, China’s “Bankruptcy Law” needs to be further clarified and refined. Although it has already been revised several times to adapt to the market economy, there are still some regulations that are more like general principles.

Fourth, in the context of increasing downward pressure on the economy, many sectors do not have a clear outlook, and firms face financing difficulties, which means they have little interest in pursuing mergers and corporate restructuring.

Finally, the current economic situation increases the risk and the consequences of corporate bankruptcies, which means that many parts of society are very wary toward bankruptcies and restructuring.

…

Reporter: According to the State Council, the Ministry of Industry and Information Technology is in charge of researching and promulgating policies on “zombie companies.” What is your plan for this work?

Feng Fei: MIIT will step up its research and survey work, find out the true situation, and figure out the major difficulties and problems in “zombie companies” exiting the market. In conjunction with relevant departments, we will research policy measures to handle “zombie companies,” improve the market, legal and policy environment, and improve the exit mechanisms for “zombie companies.”

The exit of “zombie companies” requires a proper relationship between the government and the market. The role of government is mainly to provide the necessary support for displaced workers, not to rescue companies, and to make the exit as smooth and quick as possible. At the same time, we will adhere to the policy of “more mergers, fewer bankrutpcies,” so that more exits of “zombie companies” happen through mergers and restructuring. This will result in appropriate placement of workers, reduce the impact on society, reduce the economic risk, and raise the quality and efficiency of economic development.

by Andrew

The best books I read in 2015

Here are my favorites out of the books that I read for the first time in 2015, regardless of date of publication (the same rules as previous instalments). This year I (in hindsight anyway) favored fiction about poor white people living in harsh conditions; in non-fiction there were some very good China books, which I do not often recommend. The lists are alphabetical by author, since I find it hard to rank books.

Nonfiction

  • The Night of the Gun, by David Carr. It was only after this legendary journalist died early this year that I discovered he had written a memoir. I generally don’t have much time for memoirs, but this one grabs you from the opening and never lets go. In an an unflinchingly honest investigation into his own past, he destroys all the convenient fictions about his past that he himself had come to believe. Few people have ever been better at calling bullshit.
  • The Utopia of Rules, by David Graeber. Graeber is the only current example I know of a public intellectual who is an anthropologist (a species whose influence has always lagged economists, historians and sociologists). He’s a clear and vigorous writer, and is good at mining the minutiae of daily life for broader insights. These essays are always thought-provoking, though there is always plenty to disagree with.
  • Exit, Voice and Loyalty, by Albert O. Hirschman. A legendary work of social science that fully lives up to its reputation–there are more ideas per page than in anything else I read this year. This 1970 book contains, among other things, a startlingly prescient analysis of how American political parties work, and reflections on the relationship between producers and consumers that provide a ready-made conceptual framework for understanding internet commerce. I’m still digesting it.
  • Why Did Europe Conquer the World?, by Philip T. Hoffman. An admirably clear and concise entry in the genre of big-idea books explaining European dominance. Though there are lots of interesting historical tidbits in the book, it is less a narrative than the presentation of a model that that explains why Europeans could conquer so many other peoples. The clarity of his model also allows him to make good comparisons and to think through counterfactuals very logically. More history should be written like this.
  • Meditations, by Marcus Aurelius. Okay, I know it’s a bit corny to put Meditations on a list like this, but it fits: I had not read it before, and it is certainly one of the best things I read this year. I doubt I have much to add to the centuries of commentary on this work already out there, but it’s instantly clear why this book is a classic: its immediacy and directness are almost shocking. I read the fairly new Gregory Hays translation, which is very clear and contemporary sounding; I’d be interested to see if other translations read very differently.
  • In Manchuria, by Michael Meyer. It’s a real pleasure to see a popular and nicely written book on my favorite part of China. It mixes memoir and reporting on rural conditions with a quixotic attempt to recover the mostly-forgotten history of northeast China. A reminder of how many stories about China still remain to be told.
  • China Under Mao, by Andrew Walder. An excellent and very clearly written analytical history of China under socialism. Despite the title, it is not a book about Mao per se, but really an effort to understand the economic and social systems that the Communist Party created under Mao’s leadership, and of the problems those systems in turn created. The account of the early days of Communist rule and the gradual transition to the planned economy is excellent, as is the comparison of how China fit into the development of other Communist states globally.

Fiction

  • Fourth of July Creek, by Smith Henderson. A vivid and emotionally intense novel about some rather bleak lives in rural Montana (what we used to call poor white trash). There are a couple of larger plot threads, involving a survivalist who may be a terrorist, and the protagonist’s search for his lost daughter, that flirt with the conventions of the thriller. But these help give structure to the daily struggles of our characters rather than distract from them.
  • Get Shorty, by Elmore Leonard. Joan Acocella’s retrospective of Leonard’s career was the prod for me to check out this universally-praised writer, and her recommendations did not disappoint. An endlessly amusing novel whose twists repeatedly threaten to turn into an ordinary mystery plot, but thankfully never quite do so.
  • Aurora, by Kim Stanley Robinson. A very unusual book: an epic piece of hard science fiction about why space flight is a bad idea. The polemical component of the book leaves it open to nitpicking from space geeks, but it is nonetheless a compelling and emotionally authentic story. Robinson is certainly on a roll of late–after a few books I found somewhat uninspiring, he has in short succession delivered both this book and Shaman, which was on my best-books list last year (Shaman I think has been underpraised relative to Aurora; it is a less polemical and better book).
  • Air: Or, Have not Have, by Geoff Ryman (late addition). A moving and vivid portrait of how an unpredictable new technology changes village life. A rare example of that tiny genre, science fiction for development economists.
  • The Greenlanders, by Jane Smiley. An unforgettable portrait of a people on the brink of social breakdown and environmental disaster, this 1988 novel is easily one of the best things I have ever read. Both the subject and the style recall the great medieval Nordic sagas, with their dry humor and matter-of-fact approach to death and dismemberment. Smiley pulls off the difficult trick of not having a single protagonist–the focus of the narrative moves among a number of different though related figures–without confusing the reader or losing the thread. We see the ups and downs in a family’s daily life, and how small events ramify into years-long feuds with enormous consequences. Altogether completely engrossing and convincing, historical fiction at its best. I don’t think I really have the same taste in books as Jonathan Franzen, but it’s nonetheless interesting that in 2012 he called this the best American novel of the last 20 years.
  • The Color of Money, by Walter Tevis. I have no memory of seeing the 1986 film with Tom Cruise and Paul Newman so I came to the book fresh. The story arc is simple: aging pool player tries to get his mojo back. But there are lots of surprises along the way, and the emotional struggles are as compelling as the action in the poolhall. Tevis had a fondness for the novel of competition–his The Hustler (also pool) and The Queen’s Gambit (chess) have the same structure–but this one is the best of the lot.
  • Annihilation, Authority, and Acceptance, by Jeff VanderMeer (aka the Southern Reach trilogy). Stunning and truly unique works of imagination. They are clearly inspired by H.P. Lovecraft, but unlike Lovecraft they are actually good: hallucinatory but also emotionally powerful, and distinguished by a close and loving attention to the landscape (which is unnamed but clearly the coast of the Florida panhandle).
  • 361, by Donald Westlake. I thought I had already read most of the classics of hard-boiled crime fiction, but occasionally I still find a great one. It’s hard to describe without giving too much away, so I won’t.

Genre fiction runners-up

All of these books I quite enjoyed and would happily recommend for a read on the beach or a plane ride, but they each had some weaknesses that don’t allow me to in conscience say they were among the best things I read this year.

  • The Library at Mount Char, by Scott Hawkins. Ancient gods walk among us, and they are mean.
  • Radiant State, by Peter Higgins. A warped retelling of the rise of Stalin, with golems, aliens, witches and suchlike.
  • Europe in Autumn, by Dave Hutchinson. Political thriller in a divided future Europe.
  • Seveneves, by Neal Stephenson. Classic problem-solving science fiction with plenty of orbital mechanics: what to do when the Moon blows up?
by Andrew

Looking back on my first year of blogging

This blog went live to the public approximately a year ago this week. What have I learned?

The main lesson is that blogging is good fun, as I always suspected. I was a newspaper journalist during the golden age of blogging, ca. 2005-10, and hence not really allowed to have a personal blog (I have however archived some of my favorite pieces from my Wall Street Journal days on this blog).

While these days I am no longer forbidden from blogging (thanks boss), I still edit and write thousands of words a week for my day job. So I don’t really have the capacity to do high-frequency blogging, but it’s still been great to have a venue for writing different kinds of things. A change is a good as a rest, as they say, and changing gears to do a bit of blogging in fact relaxes and clears the brain. The mainstream of this blog has still ended up being the Chinese economy, since that’s what is in my head most of the time. But I have tried to maintain some variety, since the main purpose of this blog is entertaining myself.

In fact, the two posts that got far and away the most traffic this year were probably the my least typical and most offbeat ones–which is in fact very pleasing. I had lots of fun writing those pieces; they had been bouncing around in my head for a long time looking for an outlet, which the blog finally provided. The winners were:

Some of my wonkier economic discussions about China also got decent traffic, though not the same order of magnitude as those top two:

But there was of course lots of stuff on the blog that I thought was great but which, strangely, the collective wisdom of the internet disdained. It is sad and baffling to me that Lost masterpieces of jazz-gamelan fusion resurface was not more popular. Come on people, this is important stuff! It’s what I want from the internet anyway.

On the other end of the spectrum, one of my more substantive pieces about the Chinese economy (On regional gaps, the growth slowdown and the missing middle-income trap) did not generate much in the way of traffic or comments–a disappointment as I was looking for more feedback. Maybe I should have worked harder to come up with a catchier title.

Another lesson I have learned, like many small internet publishers before me, is the importance of the aggregators. For this blog, the two most reliable drivers of traffic have been Bill Bishop and his Sinocism newsletter, and Tyler Cowen at the Marginal Revolution blog. Thanks for the links guys, I owe you both a beer.

by Andrew

David Moser recalls the early days of the Chinese jazz scene

David Moser’s piece at The Anthill, “The Book of Changes: twenty-five years in Chinese jazz” is truly delightful and a must-read. Here is one excerpt:

One striking characteristic of Chinese jazz musicians was their uniform reverence for Miles Davis. Almost to a person they preferred the spare, cooler style of Miles to the rapid pyrotechnic displays of other jazz artists. They pointed to his use of empty space and understatement, “saying more with less”, all preferences that, it seemed to me, had a resonance with Chinese visual arts. The best selling jazz album of all time is Miles’s classic Kind of Blue. In the liner notes to the album, pianist Bill Evans compared jazz improvisation to the art of calligraphy. I remember at the time thinking that it was a gratuitous comparison, a trendy invoking of Oriental exoticism. But it turned out my Chinese musician friends also saw commonalities in the two disciplines. The calligrapher, like the jazz artist, spends a lifetime mastering the basic forms in preparation for a spontaneous moment of creation, during which the artist must act in a non-deliberative way to produce one continuous, expressive “line” – for the calligrapher in space, for the jazz player in time – without the option of revising, restarting or rethinking. Each time the result is a unique form reflecting the artist’s mental and emotional state at that moment. Miles’s philosophy of jazz seemed to echo centuries of Chinese aesthetics. He famously told his sidemen, “Don’t play what’s there, play what’s not there.” If that’s not Daoism, what is?

And another:

Our group played nearly every Saturday for four years. The audiences were small but attentive, and I enjoyed the barrage of questions we received after. Puzzled by the long improvised solos, people asked me “How are you musicians able to memorize all those complicated melodies?” I told them that the music was completely ad-libbed, not memorized. “Well, without a score, how can you tell a wrong note from a right one?” Indeed. Or, “If the music is all improvised, then why bother to practice?” And, “How come the trumpet and saxophone all seem to take turns playing, while the drums, bass, and piano play all the time? They should be paid more!”

Many thanks to David for writing all this down. There are also a couple of nice photos showing some musical luminaries in their awkward youth.

by Andrew

Lessons from Douglass North, plus an amazing GDP chart

I was sad to hear of the passing of the great Douglass North earlier this week (there are obituaries from the Economist, New York Times and Washington University in St. Louis, the last focusing on his teaching). While I cannot claim deep knowledge of North’s whole body of work, I loved his book Violence and Social Orders, co-authored with John Joseph Wallis and Barry R. Weingast. Amazingly enough, the book completely lives up to its subtitle: A Conceptual Framework for Interpreting Recorded Human History. North was a social scientist who, like Gellner and Levi-Strauss, aimed straight for the big questions about what modern life is; most economists do not even know how to ask those questions let alone answer them.

The book is difficult to summarize simply so I won’t try–but one of the lessons I learned from it is in fact pretty simple. The difference between good institutions and bad institutions in terms of economic growth is not that good institutions generate higher growth. Rather, countries with good institutions are flexible and better at responding to changing conditions, so they have fewer and shallower economic downturns. That results in a higher rate of trend growth over the long term. It’s a powerful and intuitive idea: the important thing is not finding the secret sauce for economic growth, but avoiding and recovering from mistakes. Here is the relevant passage:

An underappreciated feature of the different patterns of social orders relates to why poor countries stay poor. Economic growth, measured as increases in per capita income, occurs when countries sustain positive growth rates in per capita income over the long term. Over the long stretch of human history before 1800, the evidence suggests that the long-run rate of growth of per capita income was very close to zero. A long-term growth rate of zero does not mean, however, that societies never experienced higher standards of material well-being in the past. A zero growth rate implies that every period of increasing per capita income was matched by a corresponding period of decreasing income. Modern societies that made the transition to open access, and subsequently became wealthier than any other society in human history, did so because they greatly reduced the episodes of negative growth. …

Strikingly, the richest countries are not distinguished by higher positive growth rates when they do grow. In fact, the richest countries have the lowest average positive growth rates by a substantial amount. …When they grow, poor countries grow faster than rich countries. They are poor because they experience more frequent episodes of shrinking income and more negative growth during the episodes. Countries below $20,000 income do not exhibit a strong relationship between income and positive growth rates. The same is not true for the relationship between income and negative growth rates. …The poorest countries experience both more years of negative income growth and more rapid declines during those years…

All societies are subject to random and unpredictable changes in the world around and within them. Changes in external factors like climate, relative prices, and neighboring groups as well as changes in internal factors like the identity and character of leaders, internal feuds and disputes, and relative prices all contribute to persistent alterations in the circumstances with which societies must cope. The variations in the economic performance of limited and open access societies over time reflect the inherent ability of the two social orders to deal with change. …There is no teleology implied by the framework. Nonetheless, the framework illuminates why open access societies are better than natural states at dealing with change.

The latest historical economic research in fact seems to strongly support North’s thesis. The new issue of the Journal of Economic Perspectives has a nice review article on recent work compiling long-term GDP series for several European countries. There is only one chart but boy is it a doozy–just think of all the years of scholarly effort that went into creating these data series:

seven-centuries

The chart seems to very much supports North’s thesis: historically there were indeed many episodes of growth, but they were usually followed by significant reversals. At least, until the Industrial Revolution in England came along and delivered much more consistent gains. Here are the authors, Roger Fouquet and Stephen Broadberry:

The new data shows trends in GDP per capita in the key European economies before the Industrial Revolution, identifying episodes of economic growth in specific countries, often lasting for decades. Ultimately, these periods of growth were not sustained, but they noticeably raised GDP per capita. It also shows that many of these economies experienced periods of substantial economic decline. Thus, rather than being stagnant, pre-nineteenth century European economies experienced a great deal of change. …

The paper tentatively finds that the likelihood of being in a phase of growth increased and the risk of being in a phase of decline decreased in the nineteenth and twentieth centuries. …Between the fifteenth and eighteenth century, there was an average of two economic downturns per country per century, while the nineteenth and twentieth centuries experienced less than one economic downturn per country per century. In the fifteenth and sixteenth centuries, economic downturns occurred about 8 percent of the time; in the seventeenth and eighteenth centuries, they were experienced 4–5 percent of years; and, in the nineteenth and twentieth centuries, downturns occurred 2–3 percent of the time. Thus, there appears to have been a modest reduction in the likelihood of experiencing downturns over the centuries from the fifteenth century. …Explaining the source of these differences could prove to be important for understanding how economies managed to generate sustained economic growth.

Looks like North was onto something.