Tuesday, September 20, 2005

Are the poor catching up with the rich?

Imagine - a world which enjoys a standard of living similar to that enjoyed by the citizens of an OECD country. This is the dream scenario for economic development. Can this ever happen? One way to answer this question is to look at the trends. If the poor are catching up with the rich, then perhaps in the long run the dream may come true.

The famous Solow model of economic growth predicts that the rate of economic growth should converge over time - that is, poor countries should catch up with the rich countries. However, Pritchett (1997), in a Journal of Economic Perspectives paper, points out that the gap between incomes of poor and rich countries is widening - and therefore world inequality is worsening over time. In 1870 the ratio of the richest to the poorest countries' incomes was 8:1; by 1990 the ratio was a staggering 45:1.

Fortunately this finding is not the whole story. It turns out that the economic growth in the last few decades has been concentrated in a number of countries with large populations of the poor. And two of them dwarf all the rest - China (rapid growth since the 1980s) and India (moderate to rapid growth since the 1990s). Hence a population-weighted measure of income inequality across countries shows convergence of living standards over time (Xala-i-Martin, 2002).

Finally, Becker et. al. (2005) showed that inequality analysis based only on a simple income measure is incomplete. A better measure is "full income", which adjusts a country's per capita income with improvements in average longevity. Their findings fully reinforce the convergence hypothesis, even at a country level. Gains in life expectancy were substantial even for the poorest countries in their sample. Full income in developing countries nearly doubled between 1965 and 1995, while that of developed countries grew by less than one-and-a-half times. Gains in longevity were realized through public health improvements and the spread of medical technology.

So - are the poor catching up with the rich? Well, they are gaining ground. The dream lives.

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