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[api] Why is the world so unequal?

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Russil Wvong

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Jan 23, 2003, 12:51:36 AM1/23/03

Repost from May 2002, before Google started archiving alt.politics.international.

Russil

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Subject: [api] Why is the world so unequal?
Date: Tue, 07 May 2002 11:58:25 GMT
From: Russil Wvong <russi...@yahoo.com>
Newsgroups: alt.politics.international

I probably ought to run this by an economist, but here's my understanding
of some of the underlying problems, based on what I've read. I've included
lots of references at the bottom.

1. The investment gap

In 1964, John Paton Davies Jr. wrote the following in "Foreign and
Other Affairs":

As the one and a half billion people in the underdeveloped
countries this side of the Iron Curtain flounder in the slough of
more and more of themselves -- hungry, displaced, agglomerated,
demoralized, and finally desperate or despairing -- we of the
industrialized west and north, one-third their number, are
producing ever more food and things. The average annual per
capita income in the underdeveloped countries is estimated at
about $100. The average American spends more than $100 per year
on recreation and some $480 on food and tobacco. These are static
measures of the gap.

A dynamic and broader measure is one of investment rate. The
industrial west and north is making a per capita investment, out
of savings, roughly equal to the total per capita income of the
underdeveloped countries. Thus the advanced countries are
becoming richer as the backward ones tread the water of poverty.

Nearly forty years later, the investment gap has become even wider.
The World Bank reports that in 1999, the one billion people in the
high-income countries invested an average of $5000 per person, while
2.5 billion people lived in low-income countries with a total per
capita income of $755 or less, roughly two dollars a day. For
example, the US invested $5800 per person, more than ten times the
total income per person in India ($450) or sub-Saharan Africa ($500).
[http://www.worldbank.org/poverty/wdrpoverty/report/index.htm]
See Table 1, population and GDP; Table 13, gross domestic investment.

Why is investment so important? Productivity -- output per worker --
is what determines your standard of living, since in the long run you
can't consume more than you produce. And the more capital each worker
has to work with, the higher his or her productivity. This is true
whether we're talking about a capitalist economy or a centrally
planned economy.

2. The industrialization process

Davies again:

The American people are vaguely aware of this chasm between them
and the majority of people in the world, and it troubles them. It
does not seem right. The world should not be part rich and part
poor, part overfed and part underfed.

So what can be done?

We can look at past experience: first, the industrialization of
Britain, Japan, and the Soviet Union; second, the East Asian miracle.
What can we learn from these examples?

Davies:

The cost has been high for those societies that have done it on
their own. Britain, Japan, and the Soviet Union are three
disparate cases. About the only thing that they had in common was
that they were in the same general latitude. Yet their patterns
of growth had certain things in common.

A small minority decided instinctively or by plan to industrialize
and expand the economy. They kept control of the process in their
own hands. They siphoned off a small fraction of the increase for
their personal benefit. The bulk of it was reinvested. None was
distributed to improve the lives of the workers. To the contrary,
generations of workers and peasants were sacrificed to the
national growth process. But it worked.

... Washington [the Kennedy administration] has produced the new
prescription -- do it without agony and delay; do it with
contributions -- from the United States and other advanced
countries. Maybe this will work. We do not know. It has never
been tried before. The post-World War II European and Japanese
recovery performances have little relation, of course, to the
brute creative effort required of the backward nations.

I think it's fair to say that the mission of the World Bank -- to
develop the underdeveloped countries, using foreign capital rather
than the suffering of the peasantry and the workers -- has largely
been a failure. Except, perhaps, in East Asia: Hong Kong, Singapore,
Taiwan, South Korea; more recently Malaysia, Thailand, Indonesia, and
China. What happened there?

Paul Krugman and Maurice Obstfeld ("International Economics") suggest
that the growth of the Asian tigers is explained by their
extraordinarily high savings rates, which supported high investment
rates, along with massive improvements in basic education.

The World Bank reports that in 1990, gross domestic savings in India
as a percent of GDP was 22%; in sub-Saharan Africa, 16%. In Hong
Kong, Singapore, South Korea, and China, the figures were 36%, 44%,
37%, and 38% -- nearly twice as high.
[http://www.worldbank.org/poverty/wdrpoverty/report/index.htm]
See Table 13, gross domestic savings. Note that despite the
conventional wisdom about the increasing importance of global capital,
there's a very close correlation between domestic savings and domestic
investment.

Krugman describes in more detail what happened in Singapore in his
well-known 1994 article in "Foreign Affairs", "The Myth of Asia's
Miracle":

... Between 1966 and 1990, the Singaporean economy grew a
remarkable 8.5 percent per annum, three times as fast as the
United States; per capita income grew at a 6.6 percent rate,
roughly doubling every decade. This achievement seems to be a kind
of economic miracle. But the miracle turns out to have been based
on perspiration rather than inspiration: Singapore grew through a
mobilization of resources that would have done Stalin proud. The
employed share of the population surged from 27 to 51 percent. The
educational standards of that work force were dramatically
upgraded: while in 1966 more than half the workers had no formal
education at all, by 1990 two-thirds had completed secondary
education. Above all, the country had made an awesome investment
in physical capital: investment as a share of output rose from 11
to more than 40 percent.

This analysis suggests that a key element in successful development is
having the discipline necessary to sacrifice current consumption, in
order to achieve higher productivity in the future by increasing
investment -- whether in capital goods such as tools or in "social
capital" such as primary education. This isn't something that can
be imposed by outsiders.

Davies:

The nature of most civilian leaders, liberal and conservative, is
that they want to be popular. Their inclination is toward going
along with the wishes of the people which, in underdeveloped
countries, are often conflicting and usually ignorant,
extravagant, and unattainable. So like surfboard riders, the
leaders try to balance themselves atop a breaking comber, more or
less cleverly adjusting themselves to the agitation below while
praying that they may last out the ride. The performance can be,
as was President Goulart's in Brazil and Sukarno's in Indonesia,
breathtaking for the spectator. But is it government?

The combination of exaggerated public expectations and the
leaders' desire for popularity tends to make politicians into
demagogues. And demagogues must have devils to exorcize from the
body politic. The conventional devils are the "reactionary" rich
and foreigners. But in attacking these two, the masses and their
demagogues drive out what they need for economic growth --
domestic and foreign private investment.

3. Other requirements

The ability to defer consumption isn't the only requirement, although
it certainly appears to be an important one. Other requirements:

- Political stability and effective leadership. If the country is
suffering from invasions, revolutions, and civil wars (as in China
during a good deal of the 20th century), progress is impossible.

- Effective public administration. Davies:

Even had there been a basic social harmony of purpose, there
remained the problem of the competence and vigor, not to
mention integrity, of the system of public administration.
Many of the leading figures in the governments of backward
countries are themselves intelligent, well-educated, vigorous,
and honest. In general, the same cannot be said of their
subordinates, through whom they must operate and upon whom
they are dependent. And without a reasonably competent public
administration, foreign assistance is at best wasteful and at
worst futile....

- Economic policies: fiscal balance, monetary stability, export
promotion rather than import substitution, foreign direct
investment, restrictions on capital mobility.

- Basic health and education. These are important both in themselves
and for economic development.

- Population growth.

- Environmental sustainability. Just as it's dangerous to have an
unsustainable level of consumption by borrowing from abroad, it's
dangerous to have an unsustainable level of economic activity by
destroying "environmental capital".

I don't think any of these requirements can be imposed by outsiders,
which means that successful development is primarily up to the people
of the poor countries themselves.

The West can remove some obstacles to development, such as foreign
debt and trade barriers. Agricultural subsidies are a particular
problem, since agriculture is a major part of the economy in many poor
countries. Additional foreign aid may be helpful as well (foreign aid
was cut back during the 1980s and 1990s).

4. Last words

Davies:

It may be worth recognizing that the transition of a country from
underdeveloped to developed is a growth process. This process in
a social organism is even slower (perhaps three generations), no
less complicated, and more painful than in a single human
organism. Trying to rush growth beyond the limits of organic
tolerance, as we are doing with others in a Decade of Progress, is
a mistake made by overanxious parents, the unwitting, or the
heedless.

We should therefore reconcile ourselves to the inevitability of
disorderly progress, of many wracking social revolutions, even of
long inability to progress, lapsing into chaos. These things will
happen no matter how much cash and ingenuity we put up. They are
no cause for self-reproach. They are inescapably in the nature of
the transition.

5. References

Paul Krugman and Maurice Obstfeld, International Economics

Unofficial Paul Krugman website
http://www.pkarchive.org/

"Does Third World Growth Hurt First World Prosperity?"
http://www.pkarchive.org/trade/harvard.html

"The Myth of Asia's Miracle"
http://www.pkarchive.org/trade/myth.html

"Ricardo's Difficult Idea"
http://www.pkarchive.org/trade/ricardo.html

"In Praise of Cheap Labor"
http://www.pkarchive.org/trade/smokey.htm

"The East Is In the Red"
http://www.pkarchive.org/trade/redeast.html

"Bahtulism"
http://www.pkarchive.org/trade/baht.html

"The Eternal Triangle"
http://www.pkarchive.org/trade/triangle.html

Exame (Brazil) interviews Krugman
http://www.pkarchive.org/global/exame.html

...