The Rising Wealth of Nations

The new Penn World Table, Version 6.2, comparing standards of living across countries, has just been released. The latest figures are for 2004, and, because of data lags, not all countries are included. Yet these numbers are valuable because they are of exceptional quality and they correct systematically for relative price differences across countries, which sometimes leads to surprising results.

Among the 82 countries for which 2004 data are now available, there has been really good news: real per capita GDP has risen by an average of 18.9% between 2000 and 2004, or 4.4% per year. People generally are a lot better off than they were just a few years ago. At this rate, real per capita GDP will double every 16 years.

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Many people who could not afford a car in 2000 now have one, and people who could afford only one car in 2000 now have two. People who could not afford to send their children to a good school or college now can. And so it is with many different goods and services that people consume.

One surprise is that there has been relatively little change in the ranking of countries by real per capita GDP since 2000. Despite all the talk about the Chinese economic miracle, China’s ranking has risen only slightly, from 61st out of 82 countries in 2000 to 60th in 2004 – even though per capita real GDP grew by 44% between 2000 and 2004, or 9.6% a year, the highest of the major countries.

The reason China has not risen higher is that other countries have been growing too, and because the gaps between countries are enormous. The range between the poorest and the richest countries in the world is a factor of more than 100. The average real per capita GDP of the top 25% of countries is 15 times that of the bottom 25%.

Watching these countries progress is like watching a marathon. At first, one is impressed by most of the runners, almost all of whom seem to be going fast. As they pass by, all spread out, one sees that some runners seem to be gaining rapidly. And yet they do not often overtake one another, because the distances between them are so large. Indeed, other runners are out of sight, perhaps miles ahead.

China isn’t the only success story. Other big winners in terms of real per capita GDP between 2000 and 2004 are Lithuania (up 48%), Romania (up 41%), Estonia (up 40%), Chile (up 33%), Hungary (up 32%), Greece (up 31%), New Zealand (up 28%), Australia (up 25%), Korea (up 23%), Ireland (up 23%), South Africa (up 23%), and Nigeria (up 22%).

Some of the worst performers among the major countries are Israel (a beleaguered country, with real per capita GDP up only 2% between 2000 and 2004) and Argentina (hit by a terrible financial crisis in 2001-2, up only 9% between 2000 and 2004). Economic performance in several Latin American countries was relatively weak in this period, with Uruguay’s real GDP per capita actually recording a fall by a fraction of a percent. But the overall picture is amazingly good.

If such growth rates continue, we will see relatively poor countries like India, Indonesia, the Philippines, or Nicaragua reach the average levels currently enjoyed by advanced countries in 50 years. But, of course, they will not have caught up with these countries, for those countries will have moved ahead too.

It is hard to imagine now what that world will be like with a doubling or quadrupling of just about every country’s GDP. What would all these countries do with all that money?

In 1958, the economist John Kenneth Galbraith wrote the best-selling book The Affluent Society , in which he argued that the advanced world as typified by the United States had by that year finally emerged from “grim scarcity,” when dire necessity dictated our lives, to a “world of affluence.” He wrote: “So great has been the change [in standards of living] that many of the desires of the individual are no longer even evident to him. They become so only as they are synthesized, elaborated and nurtured by advertising and salesmanship, and these, in turn, have become among our most important and talented professions.”

But real per capita GDP in the US is now three times higher than it was in 1958. What have people been spending all that extra money on? Is it all dictated by advertisers and salesmen who are inventing needs?

According to my calculations comparing 1958 and 2005 data from the US Department of Commerce, Americans spent 27% of the huge increase in income between 1958 and 2005 on medical care, 23% on their homes, 12% on transportation, 10% on recreation, and 9% on personal business activities.

The kinds of things that advertisers and salesmen typically promote were relatively unimportant. Food got only 8% of the extra money, clothing only 3%, and personal care 1%. Unfortunately, idealistic activities also received little of the extra money: 3% for welfare and religious activities, and a similar share for education.

Thus, most of the extra money was spent on staying healthy, having a nice home, traveling and relaxing, and doing a little business.

That sounds like what really happened in the US. Maybe that is the way it will be around the world. As long as we can keep worldwide growth going at its current rate, billions of people can look forward to the same kind of improvement. And that should be truly inspirational.