The World's Income Distribution: Turning the Corner?

J. Bradford DeLong
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

February 2001


Twenty five years ago you could indeed powerfully argue that on a fundamental level the world economy was not working. It was generating better technology and more output, yes, but was it making good use of that output to advance social welfare? It seemed as though the answer was no, at least not for the poorer half of the people on the globe. As time passed the world was becoming richer, but it also became a massively more unequal place. The difference in living standards, productivity levels, and life chances between rich and poor parts of the world was greater in 1975 than it had been in 1925, and vastly greater in 1975 than it had been in 1800.

Since 1975, however, we have turned a very important corner. As Yale economist T. Paul Schultz was the first (to my knowledge) to point out, since 1975 global inequality in personal incomes has not been rising but falling. Since 1975 the world has not only become a richer place, but the world's poor have seen their incomes grow faster than the world's rich. From this perspective, therefore, the world economy has been performing a lot better in the last quarter century than in the previous two hundred years.

Two hundred and fifty years ago the world economy was a relatively equal place. Everyone was very poor by our standards today--even by third world standards today. But the differences between the standards of living of the average peasant in the Yangzi delta, the average peasant in the Rhine valley, the average peasant in the Nile valley, and the average peasant in the Ganges delta were small: a factor of two at most. Malthusian population pressure kept populations high enough to push average standards of living worldwide close to subsistence, and more natural resources or better technology showed up much more in higher population densities than in higher standards of living.

Then the world changed, and the industrial revolution came. Technological progress accelerated to become fast enough to outstrip population growth and generate rising standards of living. As standards of living rose, death rates fell and birth rates fell as populations underwent the demographic transition to low fertility and low rates of population growth even when very rich. The world became an enormously richer place.

However, over the past two centuries the world also became a much more unequal place. Economic growth in the industrial core vastly outstripped economic growth at the periphery, so that the gulf between rich and poor worldwide widened to an almost unbelievable extent. The purchasing-power-parity gulf beween per capita income in the United States and in India today is not a factor of two but a factor of twenty. It is not that Indians are poorer than their predecessors of two centuries ago: today in India almost no one dies of famine; there is one television for every four households, and one radio for every two households. But standards of living and levels of material productivity in India have grown only a tenth as fast as standards of living in the developed industrial core.

That was the pattern of worldwide growth up until 1975: increasing wealth but also increasing inequality on a global scale. That was the pattern that has changed since because the 1980s and 1990s were very good decades for economic growth in the world's two largest-population countries: India and China. As best as we can estimate, India's real GDP per capita at constant prices has grown at an average of four percent per year over the past two decades--a pace at which per capita income doubles every eighteen years. As best as we can estimate, China's real GDP per capita at constant prices has grown at an average of seven percent per year over the past two decades--a pace at which per capita income doubles every decade. Today's inhabitants of China have about four times the material standard of living of their predecessors of only two decades ago. Nearly two and a half billion people in these two countries have seen their material standards of living and productivity levels increase remarkably.

China has achieved such rapid growth by dismantling the Maoist regime of economic central planning and by focusing on building a market economy, encouraging exports, accelerating education and technology transfer from abroad, and also by using local governments as decentralized engines of entrepreneurship.

India has achieved less rapid but still impressive growth by following a policy of what can only be called "neoliberalism": try hard to shrink the size of the state, try hard to shrink the magnitude of the state's bureaucratic intrusions into the economy (abandoning the requirements that investments be licensed, for example, and that private enterprise be forbidden from entering certain sectors), reduce tariffs, and encourage increased international economic integration. Stanford economist Charles Jones pointed out in the early 1990s that for most of the Nehru-Gandhi era India's internal structure of prices had been such as to make investments to boost economic growth very expensive, thus there was plenty of room for policy reform not to "get prices right" but just to get prices less wrong.

In both countries these shifts in economic policy in the past quarter century have been extraordinarily successful, although in China more successful than India.

It is this growth in these two countries--the transformation of China from desperately poor to poor, and the transformation of India from desperately poor to extremely poor--that has for the first time in at least two centuries narrowed the proportional gap between rich and poor. It has for the first time in at least two centuries made the world a more equal place.

Why, then, has no one noticed? Why are our newspapers full of reports of growing economic gulfs between rich and poor in our world? And why are they full of reports of the crisis of a model of economic development that does not serve the interests of the world's poor?

I believe that no one has noticed--or rather, surprisingly few in the first world have noticed--for two reasons. First, first-world newspapers focus on the first world. Widening income and wealth gaps between silicon plutocrats and industrial and service workers within the first world attract much more coverage and ink than does anything happening outside the boundaries of the industrial core. Widening income and wealth gaps within the first world are indeed important. But they are not the only thing worth focusing on.

Second, China and India are only two countries. At international meetings their nearly 2.5 billion people get only two voices. There are 49 other countries classified by the World Bank as "low income." They, collectively, have less than half of the population of India and China. But they have 25 times the number of delegates. And many of these other low-income countries' economies have been doing very badly indeed over the past two decades. Their poor performance and their troubles thus get much more attention than the dual successes of India and China. The typical experience of a person in a poor developing country over the past two decades has been much better than the typical experience of a country, because the typical person lives in China or India.

Whether we assign China and India to their proper place plays a key role in how we assess world economic progress over the past quarter century. No one disputes that the liberal world market economy delivers faster productivity and total output growth than alternative systems. Centrally-planned states have managed to invest more and grow faster for short periods only, and at immense and unacceptable human cost. But the Achilles' heel of the liberal world market economy has always been the sense that it fails massively when it comes to distributing the fruits of better technology and higher investment--and the steady widening of world income inequality before the mid-1970s was powerful evidence that this critique could not be readily dismissed.

But now it is much harder to argue that the world economy is permanently bound to produce slower economic growth in poor countries than in rich countries. The economic growth record of many poor countries--nearly an entire continent's worth in Africa, many in Latin America, some in south Asia--over the past quarter century has been awful. The success of Indian and Chinese growth over the past two decades makes the failure of economic growth to take hold in other very poor countries even more heartbreaking. Most of their people have not yet found a place on the escalator that leads to modernity. But cast your mind back a generation and remember how poorly India's and China's economic growth prospects were then viewed. It should be no more difficult to spark economic growth in the next generation for this final group of about one billion people who have not shared significantly in world economic growth.


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