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Difference, Big Time

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  1. Divergence, Big Time Lant Pritchett Journal of Economic Perspectives Summer 1997

  2. Main Idea • The predictions of the Solow model are not supported by data. • Countries have experienced vastly different rates of economic progress since the 1870s. • Convergence does not seem to be happening.

  3. The Facts • Lant starts with 17 “advanced capitalist” countries as defined by Maddison. • In Table 1, he documents their levels of income in 1870 and shows their average rates of growth in three subsequent periods: 1870-1960, 1960-80 and 1980-94. • Three facts jump out: (a) convergence, (b) but rates of growth around a narrow band; (c) growth rates pretty stable.

  4. The Facts • Making an inference about the evolution of the WID on the basis of these data would be wrong: de Long (AER, 1988). • There are two kinds of bias, both of which aids the “convergence hypothesis.” • One, sample selection (only rich and poor but fast-growth countries in the dataset). • Two, measurement error (if either your initial GDP data is “too high” or “too low” you help the hypothesis).

  5. How Can We Expand the Data? • How about we estimate an initial GDP per capital level for “poorer” countries outside the 17 that we just examined? • But how do we do that? • Lant comes up with some clever alternatives: • Estimate a reasonable subsistence level of GDP per capita ($250 in 1985 dollars).

  6. How Can We Expand the Data? • You can come up with such subsistence levels of income per capita by running simple OLS regressions with caloric intake data from the FOA and per-capita income data from the Penn World Tables (footnote 8). Then back-out the income per capita needed for subsistence caloric intake (under 2000/day). Turns out to be P$250. • How about the lowest five-year average GDP per capita observed in the Penn World Tables data (P$275 Ethiopia and P$278 Uganda).

  7. Putting things together • You need to buy these first: (a) the per-capita income data for the set of all countries in Penn World Tables (b) the estimates of growth for the set of now-rich countries and (c) all countries had to have at least P$250 back in 1870. • Then, there had to have been a lot of divergence in the WID between 1870 and 1960!

  8. How So? • Look at Figure 1. • If there had been no divergence, then the poorest countries in the world today ought to have grown at rates at least as high as the U. S. since 1870. Imputing backwards in time, gives us incomes well below subsistence for many countries (around P$100 or less).

  9. How So? (continued) • The U.S. per capita income grew fourfold between 1870 and 1960. In 1960, there were 42 countries (out of 125) whose per-capita incomes were $1000 or less. All of these countries must have grown at slower rates than the U.S. if they had started out at $250 in 1870 (as we have assumed).

  10. How So? (continued) • In Table 2, Lant shows us some estimates based on the $250 assumption and actual data. • The main point remains: developed countries have stable, predictable patterns of sustained growth and some convergence among them; less-developed countries are all over the map (poverty traps, takeoffs and convergence, and meltdowns.