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

Main questions Are poor countries catching up to the rich countries or falling behind? How might the world income distribution look in the future?

Overview Empirical facts concerning the distribution of GDP per worker across the countries of the world and how the distribution has changed since Characterize the future of the world income distribution using 3 different techniques.

3 different techniques 1)Using standard growth models to project the current dynamics of the income distribution forward. 2)Cross-country growth regression 3)Employ a statistical technique using the frequency of growth miracles and growth disasters

Facts First define income: GDP per capita seems natural. But in developing countries nonmarket production is quite important => GDP per worker. This paper, GDP per worker relative to U.S. GDP per worker.

World Income Distribution,

Comments on the figure U.S. highest GDP per worker in both 1960 & U.S. GDP per worker grew relatively steady 1.4 pct. annually from 1960 to Single-peaked Hump is between 5 & 30 % 1988 Twin-peaked Hump is between 20 & 65 %

Relative Y/L, 1960 vs. 1988

Comments on the figure Changes in world distribution of income are illustrated by departures from the 45-degree line. Convergence at the top of the income distribution. Divergence at the bottom. Growth miracles: Hong Kong, Korea, Botswana. Growth disasters: manly sub-Saharan countries.

Density of GDP Per Worker Weighted by Population

Comments on the figure No divergence 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 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.

The Assumption of Similar Long-Term Growth Rates Conceptural view: The argument is, that otherwise will the income ratios between to countries with different long-term growth rates diverge to infinity. What about all the endogenous growth literature (ex. technological progress )? All countries eventually grow at the average rate of growth of world knowledge.

The Assumption of Similar Long-Term Growth Rates Empirical view: U.S. grew at an average rate of 1.8 pct. per year from 1870 to 1994 while UK only grew at 1.3 pct. The resolution of this apparent inconsistency is transition dynamics. This means that countries are changing position within the world income distribution, their average growth rate can be faster or slower then the growth rate of world knowledge over any finite period.

Income in the U.S. and UK

The Future of the Global Income Distribution Solow Transition dynamics Frequency of growth miracles and growth disasters

Solow In the classical Solow 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 we need is to perdict where these variables are going to settle.

Solow Jones (1997) incorporates human capital. He further assumes that investment rates and population growth settles at the rates prevailed in the 1980s.

Steady State Incomes, based on Current Policies

Comments on the figure 1988 distribution is quite similar to the distribution of steady states. Countries like Uganda and Malawi are not poor because of transition dynamics but because technology levels and investment rates are low (population growth rates have relatively small effects in most neoclassical models).

Comments on the figure In the top of the income distribution a number of countries are predicted to surpass the U.S. in GDP per worker. Differences in income are driven by differences in investment rates in physical and human capital. U.S. have a high technology level and investment rate in human capital but too low to compensate for the low U.S. capital investment rate.

Transition Dynamics and Steady State The growth rate of relative income is proportional to the gab between the country’s current position in the income distribution and it’s steady state. Ex. A country has a GDP per worker relative to the U.S. of 0.4 and a steady state 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 world technological progress (ass the U.S. has reached its steady state).

Transition Dynamics and Steady State The key parameter ”speed of convergence” is estimated to be between 2 and 6. When using data on growth rates from 1960 to 1988 and initial incomes in 1960 the steady states can be calculated (assuming that countries obey the principle of transition dynamics over this 28-year period):

Convergence Speed of 2 pct.

Convergence Speed of 4 pct.

Convergence Speed of 6 pct.

Comments on the figures Countries that have grown faster then the U.S. over the 28-year period are predicted to continue to increase relative to the U.S. If the speed is slow the steady state must be far away in order to explain a given growth differential, implying large additional changes in the income distribution.

The Very Long-Run Income Distribution Until now policy has been assumed constant. Predicting when and where large changes in institutions and economic policies will occur is extremely difficult. Instead it’s possible to use the frequency of growth miracles and growth disasters.

Frequency of Growth Miracles and Growth Disasters

Comments on the table Fast growth and slow growth occur at roughly the same frequency at the bottom of the income distribution. For countries with incomes of more then 10 pct. of U.S. GDP per worker frequency of rapid growth rises.

World Income Distribution, Using Markov Transition Metod

Comments on the table The long-run results suggest that there is no development trap into which the poorest countries will be permantly condemned. Markov’s results strongly suggest that the convergence will play a dominant role in the continuing evolution of the income distribution.

Conclusion Fast growth has been more common then slow growth from 1960 to Countries have shown tendency to move up in the income distribution. Viewed in terms of populatons, the recent growth in China and India reinforces this conclusion. The fact that the world have not allready reached the long-run distibution indicates that the forces currently shaping the income distribution are a somewhat recent phenomenon.