https://www.nytimes.com/2018/10/20/opinion/notes-on-global-convergence-wonkish-and-off-point.html
For readers obsessed with the Trumpification of America and the looming election, I'm with you – I try not to check FiveThirtyEight more than five times a day, but it's hard. If you can't bear to think about anything else, don't read this; rest assured that this blog post isn't coming at the expense of writing about the core issue of the moment, it's a rest break, a bit of vacation in the head.
OK, that said, I read two things in the past few days that had me thinking about the biggest economic story there is: the dramatic rise of some formerly very poor nations, and the concomitant shift of the world's economic center of gravity away from the West.
One was a new paper by Patel, Sandefur, and Subramanianpointing out that overall global convergence in per capita GDP, which used to be largely absent in the data, has become very pronounced since 1990, with really fast growth in middle-income economies. The other was a tweet by my CUNY Stone Center colleague Branko Milanovic, pointing out that convergence among Western economies seems to have stalled.
I'd argue that these observations are really part of the same story. Let me start with Branko's observation.
The way I'd make sense of this observation is to argue that the West has already converged, in terms of technology and productivity. The remaining differences in GDP per capita mainly reflect different social choices over things like vacation time and retirement age, and there's no reason to expect those differences to go away.
I won't do a full statistical analysis, but let me give the example of France versus the US. Figure 1 shows French productivity – real GDP per hour worked – relative to the US, and relative real GDP per capita. What you see is that French productivity has matched that of the US for many years (it was actually higher for a while, although that was probably a composition effect reflecting an older work force.) French real GDP per capita has, however, slid relative to US levels. Why?
Partly it's fewer people working – not prime-age adults, who are more likely to be employed in France, but mainly pre-seniors, 55-65, encouraged to retire by more generous pension policies. Even more important, the French take vacations; we don't (and often aren't allowed to.)
So these are just different choices. And while France does need more pension reform (it has done some already), it's far from clear that overall French choices are worse. On many quality of life indicators, like life expectancy (Figure 2), America has fallen behind.
The end of Western convergence, then, isn't an indicator of some kind of failure. Meanwhile, the coming of rapid convergence by emerging markets is a huge success story.
When I was in grad school in the 1970s, I thought I should do development economics – because it was clearly the most important subject – but didn't, because it was too depressing. At that point it was mostly non-development economics, the study of why Third World countries seemed to fall ever further behind the West. True, we were already seeing a growth takeoff in smaller East Asian economies, but few saw this as a trend that would spread to China and India.
Then something happened; we still don't know exactly what. It's a good guess that it has something to do with hyperglobalization, the unprecedented surge in world trade made possible by breaking up value chains and moving pieces of production to lower-wage countries. But we don't really know even that.
One thing is clear: at any given time, not all countries have that mysterious "it" that lets them make effective use of the backlog of advanced technology developed since the Industrial Revolution. Over time, however, the set of countries that have It seems to be widening.
Once a country acquires It, growth can be rapid, precisely because best practice is so far ahead of where the country starts. And because the frontier keeps moving out, countries that get It keep growing faster. Japan's postwar growth was vastly faster than that of the countries catching up to Britain in the late 19th century; Korea's growth from the mid-60s even faster than Japan's had been; China's growth faster still.
The It theory also, I'd argue, explains the U-shaped relationship Subramanian et al find between GDP per capita and growth, in which middle-income countries grow faster than either poor or rich countries. Countries that are still very poor are countries that haven't got It; countries that are already rich are already at the technological frontier, limiting the space for rapid growth. In between are countries that acquired It not too long ago, which has vaulted them into middle-income status, but are able to grow very fast by moving toward the frontier.
The result is a world in which inequality among countries is declining if you look from the middle upward, but rising if you look from the middle down. Fundamentally, however, it's a story of diminishing Western exceptionalism, as the club of countries that can take full advantage of modern technology expands.
Oh, and rising inequality within Western countries means that if you look at the global distribution of household incomes, you get Branko's elephant chart.
It's not entirely a happy story. That concentration of income and wealth at the top is worrisome, not just economically, but for its political and social implications; it's one reason US democracy is teetering on the edge. And there are still hundreds of millions of people left out. But there's also a lot of good news in the picture.
I now return you to our regular political anxiety.
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