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Ending inequality between countries: not by trade alone

Is a world of approximately equal country incomes really possible to envisage any time soon?

By: EBR - Posted: Thursday, October 12, 2017

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Consider the most extraordinary, and probably unrepeatable, feat of Chinese convergence. In 1977, the US–China gap in GDP per capita (and probably very similarly in wages) was almost 50 to 1, adjusted for the difference in price levels between the two counties. (This is based on World Bank data; according to Maddison’s data, the gap was less than half that size, but still a huge 21 to 1). It is now 4 to 1. And this is the result of an average growth rate of Chinese GDP per capita of 8.5 percent over four decades.
Consider the most extraordinary, and probably unrepeatable, feat of Chinese convergence. In 1977, the US–China gap in GDP per capita (and probably very similarly in wages) was almost 50 to 1, adjusted for the difference in price levels between the two counties. (This is based on World Bank data; according to Maddison’s data, the gap was less than half that size, but still a huge 21 to 1). It is now 4 to 1. And this is the result of an average growth rate of Chinese GDP per capita of 8.5 percent over four decades.

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by Branko Milanovic*

First, even assuming that a world of approximately equal country incomes is feasible and that free trade will bring it about (the latter by itself is very dubious), we have to allow for the fact that income or wage equalization across all countries would imply a decrease, or a very slow growth, of wages for many people in the rich world. This is precisely the problem with which one grapples today. While trade was an overall “good,” it has hurt many people in rich countries.

The transition to a world of equal country incomes would necessarily involve many bumps along the road and would require finding in rich countries much better ways to compensate the income losers. This however does not seem to be happening right now. At least I cannot see it. So the first problem is that equalization of incomes or wages between the countries, led by trade alone, would require massive sacrifices from some groups of workers in rich countries.

The second problem is that income gaps in the world are enormous and it is impossible, under the best of scenarios, that they should be done away with within this century.

Chinese convergence

Consider the most extraordinary, and probably unrepeatable, feat of Chinese convergence. In 1977, the US–China gap in GDP per capita (and probably very similarly in wages) was almost 50 to 1, adjusted for the difference in price levels between the two counties. (This is based on World Bank data; according to Maddison’s data, the gap was less than half that size, but still a huge 21 to 1). It is now 4 to 1. And this is the result of an average growth rate of Chinese GDP per capita of 8.5 percent over four decades.

The gap between Europe and Africa

The gap between German GDP per capita (proxy for that of Western Europe) and Sub-Saharan Africa’s today is 13 to 1. (German’s GDP per capita is about $45,000 vs. population-weighted Sub-Saharan GDP per capita of $3,500; all in purchasing power parity dollars). With Africa’s population expected to more than double by 2050, do we really see Africa able in the next three or four decades to repeat Chinese growth experience?

Note that replicating Chinese per capita growth and given the projected population growth in Sub-Saharan Africa of 2.4% per annum, would require African countries to grow on average by almost 11% per year for approximately half a century. And how did Sub-Saharan Africa fare during the last, relatively good, decade? Its overall GDP grew by 4.5 percent per annum. Thus, even under the most favorable and implausible assumptions of convergence, income gaps are unlikely to be eliminated for at least three to four generations.

The importance of migration

This, in turn, points to the importance of migration. If a borderless, cosmopolitan world is to be achieved (an objective with which I agree, but see enormous political difficulties in reaching it) migration is absolutely essential. But as economic migration faces increasing obstacles in rich countries (and, it has to be added, not solely because of xenophobia but for economic reasons as well), the ideal of a world “without injustice of birth” (i.e. of being born in a rich or poor country) recedes.

To make my point clear: I am very sympathetic to the borderless world. But to believe that it can be achieved through trade alone, and without significant migration, is unrealistic. And once we say “migration,” we immediately open the Pandora’s box that the most recent elections in Europe and the United States have shown is a reality, not an imagination.

If we need an “intellectual revolution,” it is not just how to improve free trade agreements, but how to reconcile a very real migration pressure with political realities of rich countries.

*Branko Milanovic is the Presidential Professor at the City University of New York's Graduate Center, and Senior Scholar at Luxembourg Income Survey.
**First published in www.theglobalist.com

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