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 21st
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
