Wednesday, November 01, 2006

Growing World

Robert Shiller has a nice article in Project Syndicate, describing what he has learnt from the new Penn World Table, version 6.2.

Among the 82 countries for which 2004 data are now available, there has been really good news: real per capita GDP has risen by an average of 18.9% between 2000 and 2004, or 4.4% per year. People generally are a lot better off than they were just a few years ago. At this rate, real per capita GDP will double every 16 years.

However, there has been little change in the relative ranking of countries.

Despite all the talk about the Chinese economic miracle, China’s ranking has risen only slightly, from 61st out of 82 countries in 2000 to 60th in 2004 – even though per capita real GDP grew by 44% between 2000 and 2004, or 9.6% a year, the highest of the major countries.

The reason China has not risen higher is that other countries have been growing too, and because the gaps between countries are enormous. The range between the poorest and the richest countries in the world is a factor of more than 100. The average real per capita GDP of the top 25% of countries is 15 times that of the bottom 25%.


If such growth rates continue, we will see relatively poor countries like India, Indonesia, the Philippines, or Nicaragua reach the average levels currently enjoyed by advanced countries in 50 years. But, of course, they will not have caught up with these countries, for those countries will have moved ahead too.

I myself cannot be too concerned by this. I think its more important to keep the poor countries
growing, and get their citizens to feel optimistic about the future. This would not only save lives which would otherwise be lost to cholera, dysentry, and malaria but would help temper ethnic conflict as people adopt escape the straightjacket of "zero-sum" thinking. This is the same reason I am relatively sanguine about inequality in wealthy countries.

Schiller then hearkens back to the work of Galbraith, and asks goods account for all this growth.

But real per capita GDP in the US is now three times higher than it was in 1958. What have people been spending all that extra money on? Is it all dictated by advertisers and salesmen who are inventing needs?

According to my calculations comparing 1958 and 2005 data from the US Department of Commerce, Americans spent 27% of the huge increase in income between 1958 and 2005 on medical care, 23% on their homes, 12% on transportation, 10% on recreation, and 9% on personal business activities. The kinds of things that advertisers and salesmen typically promote were relatively unimportant. Food got only 8% of the extra money, clothing only 3%, and personal care 1%. Unfortunately, idealistic activities also received little of the extra money: 3% for welfare and religious activities, and a similar share for education.

Thus, most of the extra money was spent on staying healthy, having a nice home, traveling and relaxing, and doing a little business.

Sounds they have the right priorities.

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