How valid is the claim that the twentieth century experience of economic development was ‘Divergence: Big Time’?
November 19, 2010 1 Comment
John Stuart Mill wrote of late nineteenth century capitalism that “[h]itherto it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.” As Brad DeLong (2008) explains, as late as 1871 (the last edition of Political Economy issued in Mill’s lifetime) Mill still did not think it accurate to substitute “hitherto” for “formerly.” The same cannot be said of the economic development of the twentieth century; the toil of the poorest human beings has been lightened considerably and, although there remains ambiguities, by many measures the poor world has converged on, not diverged from, the rich world.
Economic development is a term which can be defined in many ways. The most common, and straightforward, of which is a simple measurement of Gross Domestic Product GDP per capita. The historical GDP data used by Lant Pritcett (1997) led him to conclude that the growth rates of poor countries have not kept up with, nor converged on, the growth rates of rich countries over the last century leading to “Divergence, Big Time” in per capita income. Using Pritchett’s figures it is hard to argue that the world did not seen divergence in economic development in the twentieth century. With a theoretical lower bound on income at around $250 at purchasing power parity and the distribution of per capita income today, income and growth rates must have diverged across the last 150 years. From 1870 to 1990 the average absolute gap in incomes of all countries from the leader had grown from $1,286 to $12,662, an order of magnitude (Pritchett, 1997, pp 9-12).
However, the data used by Pritchett is not definitive; although both inequality within countries and inequalities between countries have increased it does not logically follow that inequality between all individuals has increased, because the first claim refers to individuals and the second refers to the per capita income of countries (Sala-I-Martin, 2006, pp 382-383). Even if the wealthiest have increased their income most quickly in India and China, by taking into account the increases in income at the bottom of the scale in these countries the “Divergence, Big Time” identified by Pritchett in the latter half of the twentieth century disappears, rather we have “Convergence, period!” (Sala-I-Martin, 2006, pg 392). Over the whole of the twentieth century, income inequality, as measured by the Gini coefficient, remained somewhat higher in 2000, at 0.637 (Sala-I-Martin 2006, pg 384), than it was at the end of the nineteenth century, between 0.588 and 0.610 (Bourguignon and Morrisson 2002, pg 731). There are problems comparing Gini coefficients constructed from two different data sets but the rough agreement between Pritchett and the data from Bourguignon and Morrisson (2002) and Sala-I-Martin (2006) reinforce the finding.
Although there is evidence that the world has seen some convergence in per capita income in the latter half of the twentieth century, the results necessarily remain ambiguous because large amounts of data are of uncertain quality. However, other measures of economic development show distinct and unequivocal signs of convergence. The most important of these is not per capita income but the poverty rates of the rich and poor world. By this measure the 20th Century has been a massive success, particularly in China and India, the worlds’ two most populous countries. Bourguignon and Morrisson offer an estimate for global poverty rates in 1890 of 71.7% and for 1910 of 65.6% (2002, pg 731). Although development has been unequal throughout the twentieth century the reduction in poverty in the last century has been truly transformative for billions of people. Even in the later part of this century the decline in absolute poverty continues, by Chen and Ravaillon’s calculations from 1981 to 2001 “[e]xpressed as a proportion of world population the decline is from 33% to 18%” (2004, pg 151).
In fact, this may be an underestimate for the progress made in eliminating poverty as Sala-I-Martin argues that by properly aggregating the data by taking into account the population size of poor countries the “poverty rate [of $1 a day] in 2000 was 7 percent.” In fact, despite a near quadrupling of world population in the twentieth century, extreme poverty fell in by both relative and absolute measures from 1,127.7 million people (Bourguignon and Morrisson 2002, pg 731) to 1089 million people (Chen and Ravaillon 2004 pg 153) or 322 million people (Sala-I-Martin 2006, pg 374). Even if you find Sala-I-Martin’s data somewhat overcooked, the trend is undeniable, economic development in the twentieth century has seen massive convergence, not divergence, for one of the most important measures.
Other measures also lend credence to the idea that the twentieth century was one of convergence in economic development, not divergence. The most high profile of these complementary measures is the Human Development Index which measures income, life expectancy and educational standards. HDI has shown significant convergence since 1950 (Crafts, 2004, pg 6) between all regions, even those which have experienced strong divergence in per capita income, like sub Saharan Africa. HDI is not the only non-monetary measure of wellbeing which can be quantified and compared. A range of other indices such as health, mortality and even Beer production (Kenny, 2005, pg 8) strongly suggest a convergence in wellbeing across the world. The most basic measures of wellbeing such as life expectancy and child mortality (which combine with other measures for the composite HDI measure) show convergence. In the middle of the 20th Century infant mortality began to decline in the developing world with this change was a concomitant increase in life expectancy (Deaton 2004, pg 28).
It is safe to argue that we have seen a convergence of many non-GDP measures of economic development. However, this aggregate convergence clouds a lot of regional differences. Even within one continent we see massive disparities in performance. Sub Saharan Africa has been ravaged by the AIDS epidemic and some have seen their life expectancy reduced to levels last seen in the 1950s (Deaton, 2004, pp 30-31). In contrast North Africa has seen rapid increases in life expectancy. The latest World Development Report (2010) highlights that Algeria, Tunisia and Morocco were some of the most successful states for improving their HDI scores, despite both relatively low GDP growth and the health disaster to their immediate south. Were “Divergence, Big Time” to be really true, it could perhaps better be used as a description for differences between poor countries than for differences between rich and poor countries.
In conclusion, while the penalties for getting institutions and policies wrong has been very high in the twentieth century in terms of accelerating GDP growth (Crafts, 2004, pg 7), other indicators have been broadly positive for economic convergence throughout the last century. The divergent average growth rates developing economies enjoyed (or suffered) between 1960 and 1990 highlights the high stakes of getting economic policy right or wrong; the worst states shrunk by an average of 2.7% per annum, while the best grew by 6.9% per annum (1997, pg 14).
However, by the end of the century, very fast growth in two very large and very poor countries, India and China, had gone some way to reversing this divergence in growth (Sala-I-Martin 2006). Although it is unclear to what extent total per capita income had diverged by the end of the twentieth century, it is fair to conclude that a claim of “Divergence, Big Time” is difficult to substantiate for anything but a very narrow reading of the term “economic development.” In fact, the latest figures from the IMF’s World Economic Outlook support this view. GDP growth at the end of the last century was roughly similar in both developing and developed worlds, 2.8% and 3.8% respectively. The last decade has seen significantly stronger growth in the developing world and this trend is predicted to continue, with growth of 2.7% predicted for 2011 for the developed world and 7.1% for the developing (IMF, 2010, pg 177).
From the outset GDP was never intended as the sole criterion of economic development, even Simon Kuznets said of his measure that “the welfare of a nation can scarcely be inferred from a measurement of national income”. The data on life expectancy, infant mortality and educational achievement all corroborate Kuznets’ 70 year old caveat. As well as the above indicators, the most important measure of economic convergence we have, extreme poverty, has been converging for most of the twentieth century. Whether we use Sala-I-Martin’s (2006) optimistic data or Chen and Ravaillon’s more modest calculations (2004), it is clear a smaller proportion of the earth’s population than ever before is living in extreme poverty. Although economic development still remains patchy and uneven across the different regions of the globe it is fairer than ever to conclude that the world has seen anything but “Divergence, Big Time.”
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Chen S. & Ravaillon M., ‘How Have the World’s Poorest Fared since the early 1980s?’, World Bank Policy Research Working Paper No. 3341 (2004).
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Deaton, A. ‘Health in an Age of Globalisation’, NBER Working Paper No.10669 (2004).
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Sala-I-Martin, X “The World Distribution of Income: Falling Poverty and… Convergence, Period”, Quarterly Journal of Economics, Vol. 121, No. 2: 351-397, May 2006
 Although movement in absolute poverty is rarely linear, the trend suggests it is safe to place the 1900 figure somewhere between those given for 1890 and 1910.