INTRODUCTION TO MODERN ECONOMIC GROWTH 2000 10000 20000 4000 gdp pe FIGurE 1.1. Estimates of the distribution of countries according to PPP-adjusted gDP per capita in 1960, 1980 and 2000 Part of the spreading out of the distribution in Figure 1.1 is because of the increase in average incomes. It may therefore be more informative to look at the logarithm of income per capita. It is more natural to look at the logarithm(log) of variables, such as income per capita, that grow over time, especially when growth is approximately proportional (e.g, at about 2% per year for US GDP per capita; see Figure 1. 8). Figure 1.2 shows a similar pattern, but now the spreading-out is more limited. This reflects the fact that while the absolute gap between rich and poor countries has increased considerably between 1960 and 2000, the proportional gap has increased much less. Nevertheless it can be seen that the 2000 density for lo GDP per capita is still more spread out than the 1960 density. In particular, both figures show that there has been a considerable increase in the density of relatively rich countries, while many countries still remain quite poor. This last pattern is sometimes referred to as the "stratification phenomenon", corresponding to the fact 4
Introduction to Modern Economic Growth 1960 1980 2000 0 .0 0 0 0 5 .0 0 01 .0 0 015 .0 0 0 2 .0 0 0 2 5 D ensity of coutr ei s 0 10000 20000 30000 40000 50000 gdp per capita Figure 1.1. Estimates of the distribution of countries according to PPP-adjusted GDP per capita in 1960, 1980 and 2000. Part of the spreading out of the distribution in Figure 1.1 is because of the increase in average incomes. It may therefore be more informative to look at the logarithm of income per capita. It is more natural to look at the logarithm (log) of variables, such as income per capita, that grow over time, especially when growth is approximately proportional (e.g., at about 2% per year for US GDP per capita; see Figure 1.8). Figure 1.2 shows a similar pattern, but now the spreading-out is more limited. This reflects the fact that while the absolute gap between rich and poor countries has increased considerably between 1960 and 2000, the proportional gap has increased much less. Nevertheless, it can be seen that the 2000 density for log GDP per capita is still more spread out than the 1960 density. In particular, both figures show that there has been a considerable increase in the density of relatively rich countries, while many countries still remain quite poor. This last pattern is sometimes referred to as the “stratification phenomenon”, corresponding to the fact 4
INTRODUCTION TO MODERN ECONOMIC GROWTH 1960 1980 c log gdp per capita FIGURE 1.2. Estimates of the distribution of countries according to log gdp per capita(PPP-adjusted) in 1960, 1980 and 2000 that some of the middle-income countries of the 1960s have joined the ranks of relatively high-income countries. while others have maintained their middle-income status or even experienced relative impoverishment While Figures 1. 1 and 1.2 show that there is somewhat greater inequality among nations, an equally relevant concept might be inequality among individuals in the world economy. Figures 1.1 and 1.2 are not directly informative on this, since they treat each country identically irrespective of the size of their population. The alter- native is presented in Figure 1.3, which shows the population-weighted distribution In this case, countries such as China, India, the United States and Russia receive greater weight because they have larger populations. The picture that emerges in this case is quite different. In fact, the 2000 distribution looks less spread-out, with thinner left tail than the 1960 distribution. This reflects the fact that in 1960 China and India were among the poorest nations, whereas their relatively rapid growth in
Introduction to Modern Economic Growth 1960 1980 2000 0 .1 .2 .3 .4 D ensity of coutr ei s 6 7 8 9 10 11 log gdp per capita Figure 1.2. Estimates of the distribution of countries according to log GDP per capita (PPP-adjusted) in 1960, 1980 and 2000. that some of the middle-income countries of the 1960s have joined the ranks of relatively high-income countries, while others have maintained their middle-income status or even experienced relative impoverishment. While Figures 1.1 and 1.2 show that there is somewhat greater inequality among nations, an equally relevant concept might be inequality among individuals in the world economy. Figures 1.1 and 1.2 are not directly informative on this, since they treat each country identically irrespective of the size of their population. The alternative is presented in Figure 1.3, which shows the population-weighted distribution. In this case, countries such as China, India, the United States and Russia receive greater weight because they have larger populations. The picture that emerges in this case is quite different. In fact, the 2000 distribution looks less spread-out, with thinner left tail than the 1960 distribution. This reflects the fact that in 1960 China and India were among the poorest nations, whereas their relatively rapid growth in 5
INTRODUCTION TO MODERN ECONOMIC GROWTH 1960 2000 8 1980 6 log gdp per capita FIGURE 1.3. Estimates of the population-weighted distribution of countries according to log gDP per capita(PPP-adjusted) in 1960 1980and20 the 1990s puts them into the middle-poor category by 2000. Chinese and Indian growth has therefore created a powerful force towards relative equalization of income per capita among the inhabitants of the globe Figures 1.1, 1.2 and 1.3 look at the distribution of gDP per capita. While this measure is relevant for the welfare of the population, much of growth theory will focus on the productive capacity of countries. Theory is therefore easier to map to data when we look at output per worker(GDP per worker). Moreover, as we will discuss in greater detail later, key sources of difference in economic performance across countries include national policies and institutions. This suggests that when our interest is understanding the sources of differences in income and growth across countries(as opposed to assessing welfare questions), the unweighted distribution may be more relevant than the population-weighted distribution. Consequently, 6
Introduction to Modern Economic Growth 1960 1980 2000 D ensity of coutr ei s w eighted by population 6 7 8 9 10 11 log gdp per capita Figure 1.3. Estimates of the population-weighted distribution of countries according to log GDP per capita (PPP-adjusted) in 1960, 1980 and 2000. the 1990s puts them into the middle-poor category by 2000. Chinese and Indian growth has therefore created a powerful force towards relative equalization of income per capita among the inhabitants of the globe. Figures 1.1, 1.2 and 1.3 look at the distribution of GDP per capita. While this measure is relevant for the welfare of the population, much of growth theory will focus on the productive capacity of countries. Theory is therefore easier to map to data when we look at output per worker (GDP per worker). Moreover, as we will discuss in greater detail later, key sources of difference in economic performance across countries include national policies and institutions. This suggests that when our interest is understanding the sources of differences in income and growth across countries (as opposed to assessing welfare questions), the unweighted distribution may be more relevant than the population-weighted distribution. Consequently, 6
INTRODUCTION TO MODERN ECONOMIC GROWTH 1980 2000 6 8 log gdp per worker FIGURE 1. 4. Estimates of the distribution of countries according to log GDP per worker(PPP-adjusted) in 1960, 1980 and 2000 Figure 1. 4 looks at the unweighted distribution of countries according to(PPP adjusted) GDP per worker. Since internationally comparable data on employment are not available for a large number of countries. "workers" here refer to the to- tal economically active population(according to the definition of the International Labour Organization). Figure 1.4 is very similar to Figure 1.2, and if anything shows a bigger concentration of countries in the relatively rich tail by 2000, with the poor tail remaining more or less the same as in Figure 1.2 Overall, Figures 1. 1-1.4 document two important facts: first, there is a large inequality in income per capita and income per worker across countries as shown by the highly dispersed distributions. Second, there is a slight but noticeable increase in inequality across nations(though not necessarily across individuals in the world economi
Introduction to Modern Economic Growth 1960 1980 2000 0 .1 .2 .3 .4 D ensity of coutr ei s 6 8 10 12 log gdp per worker Figure 1.4. Estimates of the distribution of countries according to log GDP per worker (PPP-adjusted) in 1960, 1980 and 2000. Figure 1.4 looks at the unweighted distribution of countries according to (PPPadjusted) GDP per worker. Since internationally comparable data on employment are not available for a large number of countries, “workers” here refer to the total economically active population (according to the definition of the International Labour Organization). Figure 1.4 is very similar to Figure 1.2, and if anything, shows a bigger concentration of countries in the relatively rich tail by 2000, with the poor tail remaining more or less the same as in Figure 1.2. Overall, Figures 1.1-1.4 document two important facts: first, there is a large inequality in income per capita and income per worker across countries as shown by the highly dispersed distributions. Second, there is a slight but noticeable increase in inequality across nations (though not necessarily across individuals in the world economy). 7
INTRODUCTION TO MODERN ECONOMIC GROWTH MAC ! b COG 288 NGA 6 log gdp per capita 2000 FIGURE 1.5. The association between income per capita and con- sumption per capita in 2000 1.2. Income and welfare Should we care about cross-country income differences? The answer is undoubt edly yes. High income levels reflect high standards of living. Economic growth might, at least over some range, increase pollution or raise individual aspirations, so that the same bundle of consumption may no longer make an individual as happy But at the end of the day, when one compares an advanced, rich country with a ess-developed one, there are striking differences in the quality of life, standards of living and health Figures 1.5 and 1.6 give a glimpse of these differences and depict the relationship between income per capita in 2000 and consumption per capita and life expectancy at birth in the same year. Consumption data also come from the Penn World 8
Introduction to Modern Economic Growth ESP TJK MDG TZA ECU ARG TUN MAC BFA LUX HKG BOL LCA IRN URY MYS PER FRA MWI ETH RWA TCD ZAF GHA BLZ PAN NOR GTM MAR COL CAN MDA KNA NZL DZA KAZ ATG LVA ZMB GEO SEN AUT GBR CIV SLV VCT MKD GNQ CHN EGY HND BEN SYC KOR BGR FIN TGO LBN NER GAB CRI TTO MUS USA BRB CHE GMB ZWE GRD RUSHRV GER SVK BDI COM PRY MEXCHL IRL IDN ARM BLR PRT KGZ BEL ROM NLD GRC BGD CZE POL CPV DMA ALB UKR NIC NGA VEN LKA GIN COG THA ISLAUS LSO CMR DOM PAK SWZ PHL BRA KENNPL YEM JPN STP HUN IND EST DNK MLI GNB SYR ITA JAM MOZ TUR SWE ISR LTU SVN JOR AZE UGA 5 6 7 8 9 10 log consumption per capita 2 0 0 0 6 7 8 9 10 11 log gdp per capita 2000 Figure 1.5. The association between income per capita and consumption per capita in 2000. 1.2. Income and Welfare Should we care about cross-country income differences? The answer is undoubtedly yes. High income levels reflect high standards of living. Economic growth might, at least over some range, increase pollution or raise individual aspirations, so that the same bundle of consumption may no longer make an individual as happy. But at the end of the day, when one compares an advanced, rich country with a less-developed one, there are striking differences in the quality of life, standards of living and health. Figures 1.5 and 1.6 give a glimpse of these differences and depict the relationship between income per capita in 2000 and consumption per capita and life expectancy at birth in the same year. Consumption data also come from the Penn World 8