Falling behind and catching up

There are two contrary things which have happened since the instigation of industrialisation two centuries ago. The first is a divergence in income and the second is a convergence in nearly all other measures of human wellbeing.

One of the questions we have to address is “will globalisation lead to convergence or divergence for the world’s citizens?”

The case for convergence.

As markets integrate, some maintain, material inequality will diminish.

  • There is a modernisation argument. Once poor countries get started on industrial development and the insitutions of a modern state they will continue to develop. This view was popular in the 1950s, but has fallen out of favour today.
  • Late-development. As popularised by Rostow and Gerschenkron, they argue that there are certain advantages of backwardness which can be exploited. This allows for faster growth for poorer countries, leading to them converging on the technological limit of wealth which the richest countries have hit.
  • Neoclassical growth theory argues that market integration will lead to price equalisations of land, labour and capital and thus increased demand for the poor world’s labour and resources which will cause convergence in income and prices.
  • New Growth Theory argues that a similar process as described above occurs for the diffusion of knowledge – a non-rivalous, non-excludable public good – which allows countries to catch up.

This leads to closing inequalities.

The case for divergence.

  • Marxist argue that capitalist production involves the extraction of surplus value from labour. Thus it creates and reproduces inequality because a capitalist income is in effect an economic rent, extracted from labour for by owning capital. Market integration leads to this process merely becoming international.
  • Dependency – Labour is not fully marketable and there will always be some degree of coercion between core and peripheral economies which keep the rich rich and poor poor.
  • Geography – (from Krugman) – Different economic processes have different economies of scale, therefore different developmental paths will lead to a differing economic mix. Because some economies enjoy larger returns to scale, and there are not intrinsic reasons certain industries are in certain places, inequality will naturally occur in a global environment.
  • In contrast to the case for convergence, increasing amounts of knowledge are protected and do not diffuse easily. Those with this knowledge will be wealthier than those without it.
  • Complementary factors play a role. Certain industries, skills and workers cluster in certain places. This produces network effects and positive externalities to which the returns are higher.

This leads to increasing inequalities.

What question does this lead us to ask?

  • How has the world distribution of income changed since the beginning of modern economic growth? 
  • What are the reasons for increasing or decreasing inequality in incomes?
  • Did all benchmarks of growth follow similar pathway? Did quality of life follow the same path as income?Ineq

Measuring inequality.

There are two ways of measuring inequality. World inequality and international inequality.International inequality shows us the inequality between the per capita income of average members of different nations. It offers a good measure because we have the relevant data to make this measure useful for a large number of countries across a long timescale. World inequality treats each individual as a unit and takes into account intra and well as international inequality. It gives a better picture but we only have data from the middle of the 20th C.

There are different measures which we can use to describe world and international inequality.

We can sue the Gini Coeffiecent, the Theil Index or a simple ratio of the richest 10% to the poorest 10%. Each tells us something different and has different methodological flaws and benefits.

There are also different Indices which we can measure. Income is one measure of wellbeing, but there are more. For example, literacy, life expectancy at birth and child mortality.

We also have to think about the level of aggregation which we use. We can aggregate the income/life expectancy of the world, down to the aggregate income/health of London, each is useful in certain ways, but each also obscures certain things.

What data do we have on the past?

Next we turn to the data which we have on international and world inequality back into the 19th C and before. Much of this data come from Angus Maddison, good obit here. He trailblazed the study of income of those living in the distant past. Without his work we would have a lot less to work with in Global History and would have to rely a great deal more on conjecture.

There are limits to his data, administration and statistical records are sketchy for much of the past. For example, large land empires like the Muhgal and Ottoman decentralised much of their administration – local administrators had less need for complex statistics and could rely on local knowledge, hence a dearth of records. On top of this locational problem there are difficulties in certain economic sectors too. As most wealth came from land for much of the world’s history, income information from land is well recorded. Handicrafts and transport are both more mobile and harder to tax, so records are scarcer. Both of these lead to a bias in the data, where we have no information it is safest to assume nothing has happened, this biases our view of the poor past towards it being undynamic.

However, the data sets are still magnificent and all we have to work with. 

  1820 1910 1950 1992
Gini coefficient 0.50 0.61 0.64 0.66
Mean world income (PPP at 1992 prices, $) 659 1450 1806 2801
Extreme poverty (headcount %) 84 66 55     24
Number of extreme poor (million) 887 1128 1376 1294
% of world inequality explained by between-country inequality (based on Theil index) 12 37 60 60

A few things stand out. World inequality was high in 1800 but got higher through to the 1950s where it has held steady since. The proportion of the extremely poor as sunk massively. Much of this increase inequality came from international not world changes, in some countries everyone got rich, in some very few or none did.

There is a slow down in 1950. The lead in growth rates between Europe & its offshoots and the rest of the world shrinks, a relative slowdown occurs. Catchup growth begins in Japan, and then later Southeast Asia as a whole. Different clusters of countries drive these changes.

The dominance disequalising force in the 19th C was the relatively slow growth of Asia. Income per capita in India between 1820 and 1950 rose 10% in total, in China over the same period the total was 17%, the US economy expanded 800% over the same period.

This leads us to some otehr questions which we will address.

  • Origins of inequality. When did it begin?
  • Cultural exceptionalism: Did regions have distinct features? Politics (colonialism, despotism)? Institutions? Resources? Scale of trade?
  • European convergence
  • Catching-up does work, or does it?

The period 1950-1992 (from when Maddison’s data ends) shows the effects of catch up in Asia. Three groups of countries; poor countries with low and variable growth, middle income countries with high and variable growth, and the wealthy world with low but steady growth.

The story of the modern era has been one of income divergence, but a subplot (or the main story, depending on your position) has been the convergence of various quality of life indicators.

What is driving this?

  • High-return-to-small-change hypothesis – altering behaviour slightly can massively increase survival, better personal hygeine and widespread, but cheap, vaccinations can massively boost quality of life.
  • Public health hypothesis – public health policy has been directed far better than economic policy in these contries, fewer differing national interests and fewer differences of opinion on what to do.
  • Urbanization hypothesis – as the poor world urbanises, more people more closer to doctors and they benefit from economies of scale.
  • Triumph of globalization hypothesis – the globalisation of knowledge on health and nutrition allow people to live better lives.

Is this divergence between income and other quality of life indicators important or mere trivia? Three quotes 

The income measure has always overplayed the difference between India and the United States.

Kenny, World Development 

Technologies, which appeared to have done little in increasing Third World income, have improved other measures of the quality of life … globalization has been too quickly dismissed by some as a driver of development.

Kenny, World Development 

HDI convergence is more a logical than an empirical result, arising from the index’s definition, and so is of little interest in the debate about world inequality.

Bob Sutcliffe, World Inequality and Globalization Oxford Review of Economic Policy, 20(1), 2004, 15-37.

HDI converges on well known limits, whereas maximum potential income continues to increase at 2/3% a year. HDIs are bound to converge by definition. However, the improvements in wellbeing are not trivial.

What has driven the improvement in people’s quality of life?

  1. Globalisation > Income > Health?
  2. Globalisation > Knowledge > Health?

Each of the above two mechanisms, increased income leading households to better care for themselves, or increased knowledge of best practice leading states and households to alter behaviour at relatively little cost are both viable explanations. 

Above is the Preston curve of life expectancy at birth S.H. Preston, ‘The changing relation between mortality and level of economic development’, Population Studies, 29(2), 1975.

Preston aruges that int data shows that the association between income and health is strong in poorer countries because of public policy failures. People can only afford to increase public policy if income increases. Therefore any improvement income-dependent.

Conclusions:

  • International inequality in income increased 1820 – 1950, remained stable 1950-92.
  • 1820-1950: ‘dominant disequalizing force’ is the stagnation in India and China
  • 1950-1992: Selective catching up.
  • 1992 onward: a faster and broader catch-up?
  • Catching up faster in health and education.
  • Did globalization play a differential role in income (technology of production) and HDI (technology of health)?
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About Left Outside
I blog, I drink, I study at the LSE, I work at a wine shop.

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