Global Past | Part 1

Our perception of the opportunity for future economic growth in the state of Ohio is affected by our understanding of Ohio’s relationship with the rest of the United States and the rest of the world. The Ohio Economy, while exhibiting leadership in a number of areas over the last two hundred years, has developed in conjunction with a globalizing world economy.
Small Differences in Annual Growth Rates Matter
Ideas about economic growth are obtained by a combination of life experiences with economic transactions encountered in business, and listening to other’s experiences, including those who have realized large business success. Some insight can be gained reading, comparing and weighing various economic theories. The sum of economic activity can be estimated using measures like Gross Domestic Product (GDP). A time series of annual GDP estimates reveal annual rates of economic growth. A growing economy means net business gains exceed losses, and government activity either enhances growth, is neutral, or its negative effects are outweighed by private sector activity.
If an economy is growing at a rate of, for example, 3% per year, this growth results from a combination of factors, whose relative contribution can be estimated but never known with precision, as some of the activity results from random effects and pure luck. What can be stated with precision is the law of compound growth. This law states that small differences in growth rates have large long-term effects. In order to illustrate this, the following figure shows a graph of per person or per capita GDP of two nations.

percapita

In the year 1900, both hypothetical nations start with the same per capita income of 4,000 per person. The economic growth rates (which are adjusted to account for inflation and population growth) are different. Nation A has an average real per capita income economic growth rate of 2.0% per year. Nation B has an average real per capita income economic growth rate of 2.3% per year. The differences could be due to varying levels of technology, the amount of available capital for investment, complementary versus confiscatory government tax and regulation policies, or some other factor.
For the first year, the impact is small: Nation A’s per capita income increases by $80, while Nation B’s per capita income increases by $92, for a $12 dollar difference. Over the course of 110 years, Nation A achieves a per capita income of $35,325, which is good compared with a global average of about $10,000 per person. Nation B ends up with a per capita income of $48,795, a much better outcome due to a relatively small difference in aggregate economic growth.
Not only do the residences of Nation B have nicer houses and cars, and can afford more travel, but they can also afford a larger government sector providing more services. In other words, if the difference in growth rates was due to Nation A having a less effective government, one of the negative long term results can be a smaller government sector.
One way to study the past is to reconstruct economic history, observe differences in long term economic growth rates, and research why these rates were different. This can inform present day economic policy and possibly avoid some mistakes in the future.
Biggest 20th Century Change was Economic Growth
During the 20th century, there was a large increase in global population, which depending on the accuracy of older censuses in different counties, increased by a factor of 3 or 4. From the years 1900 to 2000, the population living in cities and suburbs increased by a factor of 15 to 20.
A combination of large scale population increase and a tendency of urban area density or crowdedness to decline with the use of automobiles, increase the aggregate urbanized area by a factor of 20 to 30. Today, dozens of urbanized areas around the world easily exceed a thousand square miles of developed land.
By far the larger increase has been the growth of the global economic system. The World Economy is 72 times larger than it was in the year 1800, increasing from about a trillion dollars (adjusted backwards for inflation), in 1800, to about four trillion dollars in the year 1900, to about forty-eight trillion dollars in 2000, and now about seventy-two trillion in 2010.
These are approximations even at present, where 72 trillion is a guess that involves estimating national GDPs for over 200 countries, and adjusting for purchasing power parity. But we can state with confidence that the world economy has grown far faster than global population, resulting in an increase in per capita income. The world economy has also grown far faster than urban land, resulting in more capital investment in cities, and houses with larger rooms and more features.
This relationship can be expressed as follows:

eup

where economic monetary growth exceeds urban land growth which exceeds population growth. The following figure shows a historical trajectory from the year 1900 to present.The implications of this relationship is, that population can level off in the next few decades to 7 to 9 billion persons, and urban land area might double in size, but the global economy has the capacity to increase by a factor of ten. A 72 trillion dollar economy in 2010, at relatively slow rates of aggregate growth, can increase to 180 trillion in the year 2050, 360 trillion in the year 2100, and 720 trillion in the year 2200. Or, global per capita income can increase to about $100,000 in year 2010 USA dollars. One can look at selected neighborhoods in the United States and in other developed parts of the world, and see that at this level of average income, poverty is a thing of the past.
We have the capacity to increase from 72 trillion to 180 trillion dollars in annual economic activity in the next forty years, and the State of Ohio is positioned to benefit from this large scale change.
Global Economic Growth Estimated via Changes in Spatial Interaction
We will take a more detailed look at spatial interaction in later postings, but the main premise is the following statement: increases in technology levels also increase technology levels in transportation, communications, and utilities systems, reducing the friction of distance, making it easier for economic growth to occur. As cities get larger, their ability to trade goods and services with other cities increases, due to more connectivity possibilities as the number of business establishments grows. Decreasing friction of distance further enhances the level of trade.
For example, in the year 1800, trade between New York City and London was limited to what could be stored on wooden ships, which took weeks to cross the Atlantic Ocean. Still, this was a significant global trade route. In the year 2100, trading options includes large ocean vessels, airplanes, undersea communications cabling, and satellite based communications. The combined population of the NYC metropolitan area and London metropolitan area exceeds forty million persons, with combined economic power of about two trillion dollars of annual economic activity.
The last figure suggests the global economy can be thought of as a system of large metropolitan areas, 427 that exceeded a million persons as of the year 2000. They interact with each other, trading at varying rates depending on distance and trade route connectivity. They also interact with a surrounding field that contains a set of smaller cities and towns, and finally much of the economic activity is internal interactions.

metroareas