The race for affluence

In the coronavirus crisis, we’ve seen a sharp contrast in the fates of the rich and the poor. In high-income countries, typical citizens may wait out the quarantine in their comfortable homes, albeit anxiously; and in low-income countries, like India, migrants may be forced to take to the road to return to villages more than 100 miles away. But the crisis is surely temporary. In the long run, can we expect poor countries ever to catch up with the rich?

There are grounds for optimism. With the Internet, poor countries can adapt, more easily than before, technologies devised by the West. Since their physical capital embodying these technologies is newer on average than those of the West, they may grow more rapidly. Moses Abramowitz set forth a similar argument three decades ago. And studying the period 1960-1988, Steve Dowrick found that technological catch-up was especially apparent among the poorer members of the oil cartel OPEC (the Organization of Petroleum-Exporting Countries).

Optimists also point to the liberating effects of trade. Money these days can move easily around the world, seeking out the highest rates of return. Because capital per worker is scarcer in poor countries than in rich, it may deliver a higher rate of return than in the West. Western investors will plunge their money into Third World projects, growing their economies. In general, wrote Sachs and Warner in 1995, “…open economies tend to converge, but closed economies do not. The lack of convergence in recent decades results from the fact that the poorer countries have been closed to the world.”

And indeed, in the first decade of the 21^st century, developing economies showed signs of growing more quickly than developed ones. Vietnam, for example, may become a middle-income nation in just a few years, given its current rate of growth, according to the economists Paul Johnson and Chris Papageorgiou. On the other hand, Niger may need 734 years.

Unfortunately, growth in poor economies is volatile. In Kazakhstan, growth accelerated in 2000 and decelerated just six years later. For a typical poor economy, the rate of growth in one decade poorly predicts its growth in the next, conclude Johnson and Papageorgiou. This raises the possibility that poor economies lack the institutions that can sustain growth, as the late Mancur Olson argued. In Tajikistan, a civil war destroyed the social structure that the country had inherited from the Soviets. Over the Nineties, income in that Central Asian country plunged by nearly 10% per year.

Don’t fall into the gap

How can we determine whether poor economies are catching up with the rich? Perhaps the simplest way is to look at the relationship between the level of average income and its ensuing rate of growth. If low-income countries are converging in income per capita with high-income ones, they should have a higher rate of growth. Thus the initial level of income should correlate negatively with the growth rate.

A less direct approach would determine whether the income gap between poor countries and rich is diminishing over time. One could do this by computing the variance, which is the sum of the squared differences divided by the number of cases. Suppose that Country A is $3 richer than Country B and $2 poorer than Country C. Then the variance is $3 squared ($9) plus -$2 squared ($4), or $13 in all, divided by 3. The variance is $13/3 = $4.33. We square the difference because we care only about the size of the difference, not about whether it is positive or negative. If the variance falls from $4.33 last year to $3 this year, then that could imply convergence.

Reviewing the statistical studies of income convergence over the past half-century, Johnson and Papageorgiou find no strong evidence that the poor are catching up with the rich in the simplest sense. Instead, we observe convergence within groups of countries. Rich countries may converge among themselves, but the group of poor countries does not seem to be closing its income gap with the rich group. Contrast this to the apparent signs of catch-up in the years after World War II when many colonies became independent (perhaps boosting morale and thus output) and when nations ravaged by the war, like Germany and Japan, rebuilt, raising their rates of growth.

Dowrick reached a similar conclusion in his study of 1960-1988. Rich countries grew more rapidly than poor ones. Technologies did diffuse from rich countries to poor, but growth in these decades really was driven by increases in labor and physical capital.

So the coronavirus may become yet another barrier to the convergence of affluence across economies, unless it causes rich economies to contract more rapidly than poor ones. Convergence like that, we don’t need. --Leon Taylor tayloralmaty@gmail.com

Good reading

Moses Abramowitz. 1986. Catching up, forging ahead, and falling behind. Journal of Economic History 46: 385-406.

Steve Dowrick. 1992. Technological catch-up and diverging incomes: patterns of economic growth, 1960-88, Economic Journal 102: 600-610.

Paul Johnson and Chris Papageorgiou. 2020. What remains of cross-country convergence? Journal of Economic Literature 58(1): 129-175.

Mancur Olson. 1984. The rise and decline of nations. Yale University Press.

Jeffrey Sachs and Andrew Warner. 1995. Economic reform and the process of global integra- tion. Brookings Papers on Economic Activity 1: 1–118