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-V. First and Third World-
J. Bradford DeLong
University of California at Berkeley and NBER
January 1997; DRAFT 1.0
- The Iron Curtain
- Determinants of Relative Economic Growth
Those nations and economies that were relatively rich at the start of the twentieth century have by and large seen their material wealth and prosperity explode. Those nations and economies that were relatively poor have grown richer, but for the most part slowly. And the relative gulf between rich and poor economis has grown steadily. Today this relative gulf is larger than at any time in humanity's previous experience, or at least larger than at any time since there were some tribes that had discovered how to use fire and other tribes that had not.
This particular glass can be viewed either as half empty or as half full. Half empty: we live today in the most unequal, in terms of the divergence in the life prospects of children born into different economies, world ever. Half full: most of the world has already made the transition to sustained economic growth; most people live in economies that, while far poorer than the leading-edge post-industrial nations of the world's economic core, have successfully climbed onto the escalator of economic growth and thus the escalator to modernity. The economic transformation of most of the world is less than a century behind the economic transformation of the leading-edge economies-only an eyeblink behind, from a millennial perspective.
On the other hand, one and a half billion people live in economies that have not made the transition to intensive economic growth, and have not climbed onto the escalator to modernity. It is very hard to argue that the median inhabitant of Africa is any better off in material terms than his or her counterpart of a generation ago.
The Iron Curtain:
Begin by looking at the snaky geographic line across Eurasia that used to be called the "Iron Curtain," a name coined by Winston Churchill in a famous speech given in Missouri in 1947. On one side were regimes that owed their allegiance to Karl Marx and to Marx's viceroys on earth. On the other side were regimes that claimed during the 1946-1989 Cold War between Communism and Liberalism to be of the "free world"--and that were, if not good, at least less-worse guys: only two of the twenty most genocidal twentieth-century regimes fall on "our" side of the Iron Curtain in the post-World War II era. By the standards of the twentieth century that is not a bad score.
Comparing the GDP per Capita Levels of Economies Behind the Iron Curtain with Those of Similarly Situated Economies that Escaped Communist Rule
East-Block Country GDP per Capita Matched West-Block Country GDP per Capita Relative Gap North Korea 700 South Korea 7660 0.91 China 490 Taiwan 9550 0.95 Vietnam 170 Philippines 850 0.8 Cambodia 150 Thailand 2110 0.93 FSR Georgia 580 Turkey 2970 0.8 Russia 2340 Finland 19300 0.88 Bulgaria 1140 Greece 7390 0.85 Yugoslavia 3240 Italy 19840 0.84 Hungary 3350 Austria 23510 0.86 Czech Republic 2710 Germany 23560 0.88 Poland 2260 Sweden 24740 0.91 Cuba 460 Mexico 3610 0.88 Geometric Mean 930 Geometric Mean 8030 0.88
Walk along this geographical line from Poland to Korea, and then hop over to the only western hemisphere Communist satellite--Cuba--looking first left at the level of material welfare in the Communist country, and then right at the level of material welfare in the non-Communist country. Before Communism regions adjacent to the Iron Curtain were seen as having similar economic destinies. And the location of the Iron Curtain is a historical accident: it is where Stalin's Russian armies stopped after World War II, where Mao's Chinese armies stopped in the early 1950s, and where Giap's Vietnamese armies stopped in the mid 1970s.
Notice as you walk that to your right, outside the Iron Curtain, the countries are far better off in terms of GDP per capita. They are not necessarily better off in education, or health care, or in the degree of income inequality: if you were in the poorer half of the population--and if you were not homosexual, if you kept your mouth shut, and if you were not swept up in one of the anti-profiteer drives--you probably received a better education and had access to better medical care in Cuba than in Mexico until the collapse of the Soviet Union, and the end of Russian subsidies to Cuba at the end of the 1980s.
But the countries fortunate enought to lie outside what was the Iron Curtain are vastly more prosperous. Mexico today is, we think, some eight times as wealthy as Cuba, which few if any would have predicted in the mid-1950s before Castro seized power. Greece today is some six and a half times as well off as Bulgaria. Even the Philippines are five times as well off as Vietnam. And Taiwan--where the Chinese Nationalist Kuomintang Party retreated after losing the final late-1940s phase of their Civil War to Mao--is some nineteen times as well off as the Chinese mainland.
Depending on how you count, between two-thirds and seven-eighths of the potential material production and prosperity of a country has been annihilated if it fell under Communist rule. Communism was not only a source of genocide, it was also a source of economic stagnation and decline: not one of the brighter lights on humanity's tree of good ideas.
The fact that a large part of the globe fell under Communist rule in the twentieth century is the first major factor making for enormous disparities in the world's distribution of economic wealth across nations. Moreover, figuring out how to move from a stagnant, ex-Communist economy to a dynamic, growing one is proving very difficult. It looks as if the "economies in transition" closest to the European Union will successfully become growing economies and democratic polities: Slovenia, Hungary, the Czech Republic, Poland, Lithuania, Latvia, and Estonia all appear to be making a success of their transitions from Communism. What will happen elsewhere is still uncertain.
The nineteenth-century British philosopher and economist John Stuart Mill hoped and believed that he would live to see the world economy's distribution of income and wealth draw closer together. Cruel and inefficient tyrannies had always left countries impoverished, but--with the spread of democracy, liberty, education, and liberalism--Mill thought that cruel and inefficient tyrannies would soon be a thing of the past.
Resource and population pressure--too many mouths to feed given limited arable land and limited agricultural technology--had kept many other countries at the edge of famine. The amount of bread that the wage of a bricklayer would buy fell by a third, back to the level of 1300, during the glorious reign in England of Queen Elizabeth I. No matter what went on in high politics and courtly luxury, the mass of humanity was close to the edge of want. Life was nasty, brutish, and short.
But Mill was optimistic; Mill thought that the spread of birth control and the advance of technology would remove hunger from the world.
Mill looked out at a world where the industrial revolution, concentrated in northwest Europe, had as yet raised the standard of living of only a small proportion of the world's population. The advance of European living standards accompanied by stagnation elsewhere had opened huge relative wealth gaps between Europe and the rest of the world. Mill hoped and expected this wealth inequality to be transitory.
Democracy and literacy were spreading across the globe. The modern technologies of the industrial revolution were not the private property of any one man or group of men; instead, they were "public goods," open to all. Anyone who could read and observe could learn what were the key technologies that had made the industrial west so rich. And the material benefits from tapping the storehouse of industrial technologies were so great that businessmen and governments outside of Europe would strain every nerve to do so, and would bring their countries into the modern industrial age.
When they did so, the world's nations would draw together in terms of standards of living, and then human command over nature would continue to rise and the burden of labor to fall. For the industrial revolution was not a once-and-for-all jump in the level of technology alone, but a once-and-for-all jump in the level accompanied by a permanent upward shift in the rate of change.
In many ways, Mill was correct. The successive technological waves of the Industrial Revolution, roads and canals first, then textiles, then steam power in mining, then ironworking and railroads, and so forth, did permanently change the material conditions of human life. As technologies became more sophisticated, children became net consumers of household resources rather than net producers of resources for the household. Fertility dropped. Thus rates of population growth remained low while technology and available natural resources expanded. The industrial revolution was an enormous shock to the world economic order. It did gave Europe, and especially northwestern Europe, and especially Great Britain, an enormous edge in terms of productivity and technology. And the technologies of the industrial revolution did begin to diffuse.
In spite of stringent laws restricting the export of technologies and of skilled workers adopted by Britain, its technology leaked out to other countries. When the Lowells, Cabots, and Appletons of Boston wished to build a textile factory they hired a managing engineer, Paul Moody, from England. They gave him a substantial equity stake in the Waltham-based Boston Manufacturing Company that they had started and had based on Francis Cabot Lowell's hurried and secret sketches of British textile machinery. Industrialization spread from old England to New England, and into Belgium, Germany, northern France, and beyond in Mill's lifetime.
Yet thereafter the process of diffusion did not live up to Mill's hopes. On the eve of the twenty-first century, the world is much richer than it was in J.S. Mill's day. But the distribution of the world's wealth between nations is more unequal than when J.S. Mill wrote. The economic history of the past century and a quarter is a history not of "convergence" but of "divergence": the different countries and peoples of the world have not drawn closer together in relative living standards, but have drifted further apart.
The figure below shows the distribution of world real GDP per capita--by percentage of world population, not by nation-state--in 1993 and in 1870, as best as it can be estimated. The estimates are the standard ones from Historical Statistics: those that show merely a seven-fold multiple of material prosperity at the top end of the world income distribution over the past century. In actual fact, as I argued above, people living in the richest countries of the world today have between twenty and two-hundred times the material standard of living as their counterparts of a century ago.
Question: Does this mean that the world's poorest people today are between three and thirty times as well off as their counterparts of a century ago? Are the underestimates of economic growth as significant at the low as at the high end of the world's income distribution?
Answer: There are underestimates, but they are probably not as large. This is not to say that the world's poorest today are as poorly off as the world's poorest of a century ago. First of all consider life expectancy: even in the poorest countries today, life expectancy at birth is fifty years, twice what it was a century ago. Even the imperfect penetration of modern medical technologies into the poorest parts of the third world have done marvels for human well-being.
But the benefits that the world's poor have gotten from the invention of new goods and new types of commodities are almost surely smaller than the benefits that the rich have received from the past century's waves of innovation. Suppose that the prices of a set of commodities that take up fifty percent of your budget fall in half: the increase in your real standard of living is approximately twenty-five percent. Suppose that the prices of a set of commodities that take up five percent of your budget fall in half: the increase in your real standard of living is approximately five percent. The rich today are in the first, and the poor today are in the second, category: it truly is the case that the material standard of living of the rich today is vastly greater than the calculations of Historical Statistics suggests relative to their counterparts of a century ago, and that the material standard of living of the world's poor today is somewhat greater than the calculations of Historical Statistics suggests, relative to their counterparts of a century ago.
If the underestimate of economic growth over the past century is greater at the high end and less at the low end of the world's income distribution, doesn't that mean that standard calculations greatly underestimate how unequal the world income distribution is? Perhaps. Here we run into the limits of index numbers. We have been trying to summarize the complicated, multi-faceted considerations that make up the standard of living in a single number--real GDP per capita. We should not expect that we will be able to do this unambiguously and without distortion: we cannot even projet a map of the world onto a flat piece of paper without distortion. It might well be that different sets of "real income" measures are better for different comparisons.
But in this case correcting for possible distortions would simply amplify the message of the figure above: the world is a much, much more unequal place in relative incomes than it was a century ago.
Now there are a large number of additional caveats attached to these estimates. To mention two:
Nevertheless the major conclusion is sound: the world is, in relative terms, a much more unequal place than it was a century ago. There has been no "convergence."
Moreover, the failure of convergence is not just a failure of the diffusion of technology to reach the world's poorest nations. Some of the richest nations at the turn of the twentieth century have grown very slowly since; some of the poorest have grown very rapidly. Consider the pairs of nations Argentina and Norway, Chile and Finland, the Philippines and Japan, and Pakistan and Taiwan. Within each pair, the nations appear on the best available estimates to have begun the twentieth century at about the same levels of national product per capita. Yet today the second member of each pair has between three and eight times the material prosperity of the first member of each pair. Over the twentieth century, some of the poorest economies grew very rapidly and caught up or are rapidly catching up to the world's industrial leaders; some of the richest economies grew very slowly and fell far behind the productivity levels of the world's industrial leaders.
Growth and Non-Convergence, 1900-1987
This is not to say that the slowly-growing countries have necessarily stagnated. Many of them have not. For example, cnsider Argentina, one of the world's most disappointing performers in terms of economic growth in the twentieth century. Argentina has experienced substantial economic growth. Officially measured labor productivity or national product per capita in Argentina today is perhaps three times what it was in 1900. True productivity, taking adequate account of the value of new commodities, is higher.
But the much more smoothly-running engine of capitalist development in Norway--no more, and probably less, rich and productive than Argentina in 1900--has multiplied measured national product per capita there by a factor of nine. In 1900 Argentina was a rich First World nation: in 1913 Buenos Aires ranked thirteenth among the cities of the world in density of telephones per capita. Even as late as 1929 Argentina ranked fifth in the world in automobiles per capita, ahead of every nation save the U.S., Canada, France, and Britain. In 1900 Argentina ranked fourteenth richest out of the twenty-seven nations plotted in figure 1; in 1987 it ranked twentieth. Over the course of the twentieth century it has been overtaken by Finland, Japan, Korea, Norway, and Taiwan; and perhaps by Brazil and Chile.
For these 27 countries, for which the data are on a not-as-unsound basis as for many others, some countries have improved their standing substantially in relative wealth compared to other nations, while other countries have fallen behind. Fifteen nations have gained ground relative to the U.S. over the century. 11 nations have lost ground relative to the U.S., and have fallen behind-or fallen further behind.
Even more horrifying than the long-run failure of "convergence" to take hold is the economic performance of sub-Saharan Africa since independence. There is little good reason to believe that sub-Saharan Africa (excluding South Africa) has experienced any improvement in standards of living or national product per worker over the past third of a century. From the perspective of material wealth the years since the attainment of African independence from European colonial powers have, taken together, been a false start. This is a tremendous disappointment given the signs of increasing wealth and development seen in the colonial period, and given the high hopes that existed at the time of decolonization.
False starts and misdirected patterns of political economy appear to have extraordinarily severe consequences: the descendants of those who migrated from Sicily to New York or to Milan in the last years of the nineteenth century are today more than four times as well off as the descendants of those who migrated from Sicily to Buenos Aires. Relative economic decline is not confined to those nations that began the century far behind the industrial core in productivity. Great Britain, which in the nineteenth century played the same role in the world economy that the United States has played in the twentieth, has today a level of per capita national product perhaps two-thirds that of the United States, and noticeably below that of most western European nations.
Too great a focus on winners and losers in a relative economic growth race tends to eclipse the fact that the world economy is a positive-sum game. In the long run all are enriched by and benefit from the early success of a few.
Nevertheless, even a pattern of productivity growth that is rapid in very long-run historical perspective, like Argentina's, can appear heartbreakingly slow when compared to what, reasonably, might have been and was achieved by the world's industrial leaders. What is bad about falling behind, or falling further behind, is not that second place is a bad place to be-it is false to think that the only thing that matters is to be "top nation," and that it is better to be poor but first than rich but second. What is bad about falling behind is that the world's industrial leaders provide an easily viewable benchmark of how things might have been different, and of how much better things might have been. There was no destiny keeping Buenos Aires today from looking like Paris, Toronto, or Sidney. It was, but is no longer, a first world city--and it could have remained one.
Such enormous disparities in relative growth spring from patterns of mistakes generated by patterns of rule and of political influence. The principal producers of material wealth are an economy's workers, and not its natural resources. The presence or absence of a "culture of entrepreneurship" is not usually a deciding factor, for entrepreneurship can be found in many places. Consider the Chinese diaspora. Throughout South Asia emigrants from China play key roles in trading and manufacturing, while China proper remains one of the poorest countries on earth. It is hard to imagine that any force other than China's governors--from the Chien Lung Emperor to Mao Zedong and Deng Xiaoping--who have kept China so poor.
Determinants of Relative Economic Growth:
Three factors appear to be most important in accounting for how a country has done in relative terms in its productivity growth over the past century:
The productivity gap vis-a-vis the world's best practice. The further a country is behind the world's industrial leaders, the more scope there is for successful technology transfer. Poor countries that successfully industrialize can grow very fast indeed.
The rate of investment. High private sector investment has two benefits. First, high investment means that the average worker has a better and more productive work environment: more structures investment means better work spaces, and more equipment investment means more machines to amplify productivity. Second, high investment--especially high machinery investment--is essential to use better technologies. A very large chunk of new and better technological knoweldge is embodied in the machines that are the principal creation of the industrial revolution, in the sense that new and more productive technologies are impossible to utilize without the appropriate capital equipment. Many factors affect the rate of investment, including:
- national savings rates
- foreign investment rates
- tax systems
- the extent of "kleptocracy"--the extent to which the government is best described as "rule by the thieves"
- the real rate of interest
- the economy's relative price structure--are the goods that make up investment relatively cheap or relatively dear
- the degree of free trade
But many of these appear to affect economic growth primarily through their effects on the rate at which the stock of capital goods is built up, and not to have an independent effect working through other channels than the rate of investment.
Whether market forces or bureaucractic commands govern resource allocation. Market forces exert pressure to allocate resources to their most productive uses. Bureaucratic commands exert pressure to allocate resources following other logics. A country like the Soviet Union or like Zambia can have a very large technology gap and a high measured rate of investment. But if investment is allocated and industries grow not by the profitability of its use but by the political power of its users, it will not do nearly as much good for productivity and economic growth.
The post-World War II period shows a clear and strong relationship between relative backwardness and productivity growth. Each one percentage point gap in productivity in 1960 carries with it an increase in the rate of productivity growth of between 0.02 and 0.03 percentage points per year over 1960-85. A country like Hong Kong-with an initial GDP per worker gap of some 70%-should "catch up" because of this factor alone and close of the gap from 70% to some 50-58%-between 1/6 and 1/4 of the total initial gap-over 1960-85.
Yet of all the factors associated with rapid growth, perhaps the most important is the rate of investment.
Why should investment play such a key role? It is, of course, no accident that the era in which European economic growth took off is called the Industrial Revolution. Blanqui, first to use the phrase industrial revolution in print, identified its beginnings in the invention and spread of those "two machines, henceforth immortal, the steam engine and the cotton-spinning [water frame]." Ever since, qualitative historical discussions of growth have emphasized the role of machinery investment in augmenting labor power. Historians of technology have long argued that the capital goods industries are uniquely well suited to serve as centers for technological diffusion to other sectors of the economy where such knowledge had practical applications.
This suggests a role for government intervention to advance industrial development: the government should step in because private investors do not face the right incentives to develop and invest early and heavily in modern machinery and equipment.
Of course that governments can does not mean that governments will. Over the past two decades, many have argued that the typical systems of regulation introduced in developing countries to accelerate development were in fact retarding development. First, they were preventing the economy from responding to international price signals by shifting resources to activities in which the country had a long-run comparative advantage. Second, they were inducing firms and entrepreneurs to devote their energies to seeking rents by lobbying governments instead of seeking profits by lowering costs.
When taken as a group, poor countries have not closed any of the gap relative to the world's industrial leaders over the post-World War II period. Poor countries have relatively low shares of investment in national product: capital goods are relatively expensive, meaning that even a hefty savings effort translates into little increase in the capital stock; savings rates are relatively low; and taxes are siphoned off to maintain the incomes of politically powerful groups rather than to support public investment projects.
The general conclusion is one that either Adam Smith or Karl Marx would have found natural: market economies prosper and grow when they are managed in the interests of the business class. When governments intervene to shift prices and quantities in order to distribute income away from the productive and entrepreneurial classes-both current and prospective future members of the bourgeoisie--and toward others, whether urban consumers, bureaucrats, or small-scale inefficient rice farmers--economic growth and development suffers.
Poor countries could grow rapidly if their governments took a long-run view of their people's interest and followed appropriate policies. But what pressures are there to push governments-especially unelected, non-legitimate modern dictatorships-to take a public-spirited long-run view? W.W. Rostow recounts a visit by President Kennedy to Indonesia in the early 1960s; Kennedy talked about economic development, and a South Asian development bank to provide capital for Indonesia's economic growth. The Indonesian dictator Sukarno's response? "Mr. President, development takes too long. Give me West Irian [province to annex] instead." Sukarno got West Irian to annex; under Sukarno Indonesia's economy stagnated.
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