Over the past two centuries of rapid global
growth, the gap in incomes between rich
and poor countries has widened
dramatically. In more recent decades, the
gap seemed to stabilise somewhat, as many
once-poor countries made faster progress--but, in the aggregate, income inequality
among nations has failed to diminish. In
some quarters this has come to be regarded
as the natural, or at any rate global-capitalist, order of things: the rich get richer
and so do the poor, but without ever
catching up.
To believe that the gap is immutable,
however, is a mistake, as a simple model
makes clear. The same process that has
increased international inequality in the past
could well reduce it, and almost as sharply,
over the coming century. Robert Lucas, a
professor of economics at the University of
Chicago (and a hugely influential economic
theorist), offers this model and its striking
result in a forthcoming issue of the Journal
of Economic Perspectives devoted to essays
on the future of the discipline.
Imagine a world made up, like our own, of
many different economies. Suppose each of
them had an average income per head of
$600 (in 1985 dollars) in pre-industrial
times--in 1800, say. Also suppose that
starting in 1801 one of these countries
began to experience steady and continuous
growth, at a per person rate of 2% a year.
This hypothetical leader would by now, 200
years later, have an average income of more
than $30,000.
Further suppose that in due course, and
after varying delays, other countries also
started to grow. Assume in fact that they
grew faster than the leader: at 2% a year
plus a margin proportional to the gap
between follower and leader. Eventually the
followers will catch up; from then on all
countries will grow at the same rate of
2%. Again, to be specific, set this catch-up
margin so that a new entrant in 1850 grows
initially at 4.5%, a new entrant in 1900 at
7%, and so on, with the initial margin
increasing at a rate of 2.5 percentage points
for every 50 years of delay before growth
begins. The left-hand chart shows the
resulting pattern for four equally-spaced
economies: the later each country starts to
grow, the bigger the starting-gap between it
and the leader, and the faster its initial
growth.
In this model, what decides the delay before
any given country takes off? It assumes that
a country's chance of embarking on growth
depends on average incomes in the world at
that date: the richer the world as a whole,
the greater the chance that any given pre-industrial country will begin to grow. The
particular numbers Mr Lucas chooses yield,
accordingly, a pattern of growth that starts
quite slowly in the 19th century (when
global incomes are low), accelerates
markedly during much of the 20th century
(as global incomes increase), and then tails
away late in the 20th century (because by
this time there are fewer remaining pre-industrial economies where growth has not
yet begun).
This skeletal model therefore has two kinds
of international growth "spillover". First,
the rate of growth, once growth has begun,
depends on the income gap between leader
and follower. Second, the chance of starting
to grow in the first place depends on
incomes in the world as a whole. Modern
economic theories have a lot to say about
how both these kinds of catching-up
spillover might operate. Some economists
emphasise human capital (knowledge
produced anywhere can benefit producers
everywhere); others point to the role of
policies and institutions in the process of
diffusion; still others are mainly interested
in diminishing returns (arguing, for instance,
that high wages in the leaders cause capital
to flow elsewhere).
Mr Lucas's paper, however, makes two
points. First, this simple model tracks the
main facts of global growth better than you
might think--as it should, given that Mr
Lucas has calibrated it with this in mind.
Second and more interesting is what the
model, if true, then says about the future.
This can be crisply stated. Starting towards
the end of the 20th century, growth in this
hypothetical world economy starts to slow.
This is because so many countries have
already moved through the earliest and
fastest stages of the catch-up process. From
now on, in a transition lasting decades, the
world slowly converges on its (assumed)
long-term growth rate of 2%. For this very
reason, though, inequality among nations
diminishes too. Think about that. Exactly
the same capitalist arithmetic of diffusing
prosperity which caused international
inequality to rise for 150 years after 1800
causes it to fall over the next century.
If Mr Lucas's chosen values are at all
accurate, the coming decline in inequality
will be steep. The past few decades'
stability in measures of global inequality
would not after all point to an irreducible
gap between rich nations and poor. On the
contrary: the past few decades would
represent a turning point, so far as equality
was concerned, in a centuries-long process
by which the economic advances of the
industrial revolution were spread right
around the globe.
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