On the Evolution of the World Income Distribution Chad Jones Journal of Economic Perspectives Summer 1997

Topic Documentation paper How did the income distribution across countries evolve since 1960? How might it evolve looking ahead? –Will it become more equal or less? –Will impoverished economies become a thing of the past?

Methodology In making predictions about the future, he relies on three techniques: –Use standard Barro-type, cross-country growth models and predict out of sample. –Mankiw, Romer, Weil (1992) type empirical growth analysis to predict how far each country might be from its steady state. –Markov Transition Matrices.

What are the Basic Facts? Before we begin, why use GDP per worker? He argues that this way both the numerator and the denominator use data from the market sector. Fine, but… In Figure 1, he plots GDP per worker (relative to that of the U.S.) for 121 countries in two years: 1960 and What do we see? Quite amazing; no?

More Facts Wide distribution. Richest to poorest ratio in 1960 was 35! It gets even wider in We go from a single-peaked distribution to a “twin-peaks” one. The “middle class” is disappearing. In a figure like this we cannot see how much the average world income grew over 1960 and Why?

More Facts In fact, over that time period, GDP per worker declined in 11 of the 121 countries in the sample. To examine how each country actually fared relative to the U.S., Chad gives us Figure 2. What does it show? Lots of miracles (HKG, SGP, JPN, KOR, OAN, BWA, ROM, LSO) and disasters (TCD, GUY, MOZ, MLI).

More Facts Another thing you may not like about Figure 1 is that it takes countries as the basis of comparison (the average person in each country gets equal weight). But we can draw the same figure by weighing each country by their total population size (recall that in two countries, China and India, one-third of the world lives). Now what do we get? Roughly the same story but there is some catching up.

Technical Issue Before we get to predictions, “Can countries grow at the same long-run rate?” If you believe “New Growth Theory” you might be tempted to answer “no.” In fact, “yes.” Yes because conceptually ideas do not know borders and empirically…. Figure 4.

The Future (1) Let’s predict the steady state incomes using Solow: Then we get Figure distribution similar to the steady state figure. Some countries will not catch up but a lot will.

The Future (2)How about we predict the speed of convergence a la MRW—Transition Dynamics? He then integrates the above equation (with alternative rates of convergence) and solves for for each country. The outcome is Figure 6.

The Future Why does the middle panel and the lower one make more sense? Because at a 2 percent rate of convergence to the steady state, explaining the recent growth miracles requires you to conclude that they are currently way below their steady states. Thus, they end up with s.s. incomes in excess of 150 percent of that of the U.S.

The Future (3)The Markov Transition Matrix: What is wrong with (1) and (2)? In fact, this is awful. But we can use countries’ growth rates between 1960 and 1988 and their incomes in 1960 (relative to the U.S.) to tabulate income and growth outcomes.

The Future Then we can use this Table 1, to calculate the movement of countries from one category (i.e. poor and intermediate growth to middle income and slow growth) over time Results are in Table 2. What do you think?