Economist Deirdre McCloskey recently explained the Rule of 72, which states that if something grows at a rate of 1% per year, it will take 72 years to double. If it grows by 2%, it will take half as long, or 36 years. She pointed out that over the past 60 years, Brazil’s GDP per capita has grown at an average rate of 2% per year, doubling every 36 years. He also pointed out that from 1999 to 2021, McCloskey said if growth falls below 1%, the grandchildren are getting impatient.

Then I read that the economist Emilio Ocampo of Argentina pointed out that Ecuador, despite an unruly populism that was as unruly as Kirchnerism or even more so, has seen superior growth over the past two decades. So it occurred to me to do an exercise with the countries that are at the center of the dollarization debate these days: Argentina, Ecuador and Panama to illustrate the importance of economic growth. We could include many more countries, but space is limited here and three serve to illustrate the point.

Argentina is debating dollarization

Between 1961 and 2021, Argentina’s GDP per capita grew by an average of 0.99% per year, Ecuador’s by 1.32%, and Panama’s by 2.84%. Thus, the income of an average Argentine doubled every 72.2 years, an Ecuadorian every 54.16, and a Panamanian every 25.28. Note that only a 0.33% difference in growth between Argentina and Ecuador resulted in the Argentines taking another 18 years to double their incomes. If you feel lucky to be Ecuadorian, remember that it took us 28 years longer than the Panamanians in the same period. The average Ecuadorian had to wait twice as long as the Panamanian for his income to double, and the Argentine almost three times.

Incentives to increase credit

McCloskey said if growth falls below 1%, the grandchildren get impatient.

Sixty years is too long a period with many ups and downs, essentially different phases. Those decades include at least two commodity booms — on which Ecuador and Argentina are still heavily dependent — as well as a lost decade (the 1980s) and dollarization in our case. So I repeated the exercise considering the period between 1980 and 1999: Argentina’s GDP per capita grew by an average of 0.4%, Ecuador’s by 0.15% and Panama’s by 1.69%. At that rate, Argentine grandchildren could expect income to double in 176.9 years, Ecuadorians 469.26 years, and Panamanians 42.38 years.

Then the situation improved considerably between 2000 and 2021 for Ecuador and Panama. Ecuador’s GDP per capita grew by an average of 1.22%, and Panama’s by 3.3%, while Argentina continued at just 0.8%. At this rate, Ecuador’s grandchildren could expect to double their income in 58.87 years (410 years less than previous generations), and Panama’s only 21.23 (half as much as previous generations). Instead, the poor Argentine grandchildren are 89.94 years old.

That is why it is extremely important to adopt policies that encourage growth. The monetary stability we have enjoyed over the past two decades thanks to dollarization and the trade opening that has been underway for three decades — now with a special push from this administration — have certainly contributed to higher growth. Will the grandchildren be able to wait? (OR)