On the Evolution of the World Income

1. On the Evolution of the World Income by Charles I. Jones

2. Main questions • Arepoorcountriescatching up to the richcountriesorfallingbehind? • Howmight the worldincome distribution look in the future?

3. Overview • Empirical facts concerning the distribution of GDP per workeracross the countries of the world and how the distribution has changedsince 1960. • Characterize the future of the worldincome distribution using 3 differenttechniques.

4. 3 differenttechniques • Using standard growth models to project the currentdynamics of the income distribution forward. • Cross-country growth regression • Employ a statisticaltechniqueusing the frequency of growthmiracles and growthdisasters

5. Facts • Firstdefineincome: • GDP per capitaseemsnatural. • But in developingcountriesnonmarketproduction is quiteimportant => GDP per worker. • Thispaper, GDP per worker relative to U.S. GDP per worker.

6. World Income Distribution, 1960 1988

7. Commentson the figureU.S. highest GDP per worker in both 1960 & 1988.U.S. GDP per workergrewrelativelysteady 1.4 pct. annually from 1960 to 1988. 1960 1988 Twin-peaked Hump is between 20 & 65 % • Single-peaked • Hump is between 5 & 30 %

8. Relative Y/L, 1960 vs. 1988

9. Commentson the figure • Changes in world distribution of incomeareillustrated by departures from the 45-degree line. • Convergence at the top of the income distribution. • Divergence at the bottom. • Growthmiracles: Hong Kong, Korea, Botswana. • Growthdisasters: manlysub-Saharancountries.

10. Density of GDP Per WorkerWeighted by Population

11. Commentson the figure • Nodivergence at the bottom. • The income of the country containing the median person has improved from 8.1 pct. of U.S. income in 1960 to 11.8 pct. in 1988. • The 75th percentile of the population lived in a country with 22.5 pct. of U.S. income in 1960, but 40.3 pct. in 1988.

12. The Assumption of SimilarLong-TermGrowth Rates • Concepturalview: • The argument is, thatotherwisewill the income ratios between to countrieswithdifferentlong-termgrowth rates diverge to infinity. • Whatabout all the endogenousgrowthliterature (ex. technologicalprogress )? • All countrieseventuallygrow at the average rate of growth of worldknowledge.

13. The Assumption of SimilarLong-TermGrowth Rates • Empiricalview: • U.S. grew at an average rate of 1.8 pct. per year from 1870 to 1994 while UK onlygrew at 1.3 pct. • The resolution of thisapparentinconsistency is transition dynamics. • Thismeansthatcountriesarechanging position within the worldincome distribution, theiraveragegrowth rate canbe faster orslowerthen the growth rate of worldknowledge over anyfiniteperiod.

14. Income in the U.S. and UK

15. The Future of the Global Income Distribution • Solow • Transition dynamics • Frequency of growthmiracles and growthdisasters

16. Solow • In the classicalSolow model the long run level of output per worker is a function of the rate of investment in capital, the growth rate of labor force, and the level of technology. • All weneed is to perdictwherethese variables aregoing to settle.

17. Solow • Jones (1997) incorporates human capital. • He furtherassumesthatinvestment rates and population growthsettles at the rates prevailed in the 1980s.

18. Steady State Incomes, basedonCurrentPolicies

19. Commentson the figure • 1988 distribution is quitesimilar to the distribution of steadystates. • Countrieslike Uganda and Malawi are not poorbecause of transition dynamics but becausetechnologylevels and investment rates arelow (population growth rates have relatively small effects in most neoclassical models).

20. Commentson the figure • In the top of the income distribution a number of countriesarepredicted to surpass the U.S. in GDP per worker. • Differences in incomeare driven by differences in investment rates in physical and human capital. • U.S. have a hightechnologylevel and investment rate in human capital but toolow to compensate for the low U.S. capitalinvestment rate.

21. Transition Dynamics and Steady State • The growth rate of relative income is proportional to the gab between the country’scurrent position in the income distribution and it’ssteadystate. • Ex. A country has a GDP per worker relative to the U.S. of 0.4 and a steadystate of 0.5 (20 pct. gab). If speed of convergence is 5 pct. per year, the actural GDP grows at 1 pct. plus the growth rate of worldtechnologicalprogress (ass the U.S. has reacheditssteadystate).

22. Transition Dynamics and Steady State • The key parameter ”speed of convergence” is estimated to bebetween 2 and 6. • Whenusing data ongrowth rates from 1960 to 1988 and initial incomes in 1960 the steadystatescanbecalculated (assumingthatcountriesobey the principle of transition dynamics over this 28-year period):

23. Convergence Speed of 2 pct.

24. Convergence Speed of 4 pct.

25. Convergence Speed of 6 pct.

26. Commentson the figures • Countriesthat have grown faster then the U.S. over the 28-year periodarepredicted to continue to increase relative to the U.S. • If the speed is slow the steadystate must be far away in order to explain a given growthdifferential, implying large additionalchanges in the income distribution.

27. The VeryLong-RunIncome Distribution • Untilnow policy has beenassumedconstant. • Predictingwhen and where large changes in institutions and economicpolicieswilloccur is extremelydifficult. • Insteadit’spossible to use the frequency of growthmiracles and growthdisasters.

28. Frequency of GrowthMiracles and GrowthDisasters

29. Commentson the table • Fast growth and slowgrowthoccur at roughly the same frequency at the bottom of the income distribution. • For countrieswithincomes of more then 10 pct. of U.S. GDP per workerfrequency of rapid growth rises.

30. World Income Distribution, UsingMarkov Transition Metod

31. Commentson the table • The long-runresultssuggestthatthere is nodevelopment trap intowhich the poorestcountrieswillbepermantlycondemned. • Markov’sresultsstronglysuggestthat the convergencewillplay a dominant role in the continuing evolution of the income distribution.

32. Conclusion • Fast growth has been more commonthenslowgrowth from 1960 to 1988. • Countries have showntendency to move up in the income distribution. • Viewed in terms of populatons, the recent growth in China and India reinforcesthisconclusion. • The factthat the world have not allreadyreached the long-rundistibutionindicatesthat the forces currentlyshaping the income distribution are a somewhat recent phenomenon.