TCS Daily


The Greatest Story Never Told

By Nick Schulz - June 14, 2002 12:00 AM

What is the biggest story of the last generation? The question is not a simple one to answer. After all, the last two decades have seen significant and in some ways entirely unprecedented global changes: The fall of the Berlin Wall and the collapse of communism; the information and biotechnological revolutions; the emergence of Islamo-fascism with a global scope; and, to some who share Al Gore's dismal view of the world, the big story is how man is destroying the planet.

The right answer, though, is: "The emergence of a world middle class." This development -- the extraordinary increase in wealth and relative economic equality across the board and around the world -- is the unsung story of the last 20 years. (The influential academic Denis Dutton scratched the surface of this answer two years ago; new evidence confirms his earlier points and broadens the scope).

We often hear that the rich are getting richer and the poor are getting poorer. And through some periods of history and in some places that's been true. But in the last two decades, not only are the rich getting richer, but the poor around the world have become richer, too -- in some ways almost miraculously so.

In the last thirty years, the global poverty rate has dropped, meaning there are fewer poor people around the world as a percentage of the world population. Amazingly, the poverty "head count" has dropped, too -- 235 million fewer people are living below the poverty level today than there were in the early 1970s, even though the global population has increased by well over a billion people since that time.

Inequality: Past, Present, Future

Still, some might complain that it's not enough that the poor are getting richer, or that there are fewer of them, because the rich are getting so much richer. Income inequality, they say, is getting worse, creating social frictions among classes and offending our collective sense of social justice.

Only this, too, is not true, as we find in an important new paper published for the National Bureau of Economic Research from Columbia University economist Xavier Sala-i-Martin. Of some nine different measurements of global income inequality, all demonstrate that global inequality lessened over the last generation.

It is these developments -- a decreasing global poverty rate, decreasing absolute numbers of poor people, and decreasing global inequality -- that have helped give rise to what Sala-i-Martin calls a "world middle class."

In the 1970s, such as class didn't exist: The distribution of income around the globe then was characterized by what economists call a "bimodality." What that means is that if global income distribution were mapped on a statistical grid, some 30 years ago there would be a "hump" curve distribution of poor people, and then another hump curve distribution of richer people (albeit not nearly as large in number). But the last 30 years - especially the period of the '80s and '90s -- have seen that bimodality vanish. Now there is a single, large, gradual "hump" through the statistical middle -- a global middle class.

Now, the Bad News

The growth and increasing prosperity of the '80s and '90s should give pause to the various critics of globalization, from Nobel prize winning economist Joseph Stiglitz to the post-pubescent protesters at global confabs. Indeed, the one exception to this global good news of economic growth producing greater equality -- Africa -- substantially undermines their protests against globalization.

The last 30 years have been a disaster for Africa. In 1970, 76% of the world's poor lived in Asia and only 11% lived in Africa. Today, those two continents have switched places -- 66% of the world's poor live in Africa while only 15% live in Asia. These differences are due almost entirely to the different growth paths each region took. Asia rode a wave of export-led growth in an increasingly globalized world to stunning economic progress, while Africa's economy tragically shrunk.

These sad facts have led Sala-i-Martin to conclude, rightly, that figuring out how to turn around the growth performance of Africa is "the most important question in economics." Where might we want to look -- and, more importantly, not look -- for answers to the problems Africa faces?

It's Growth, Stupid

Let's return to the question of income inequality. Many liberal economists have fretted over economic growth, fearing it will exacerbate income inequality; while many libertarian economists and others have argued that economic growth doesn't lead to greater inequality -- and even if it did, what matters most is that the least well-off in society benefit from the growth.

Depending on where you look, there's evidence to support your position. For example, economic growth in China has been enormous over the last 30 years, but income inequality has worsened. This example suggests that economic growth and rising income inequality go together.

But consider Indonesia. An extraordinarily poor country in 1970, Indonesia experienced strong economic growth for three decades eliminating poverty in remarkable fashion. But income inequality lessened over that same period, undermining the supposed link between growth and rising inequality.

And consider the case of Nigeria where since the 1970s the rich did indeed get richer while the poor got much, much poorer all while Nigeria's economy contracted significantly.

What these examples suggest is that politicians, bureaucrats, and policy makers concerned about the welfare of least well-off members of society should concern themselves primarily with creating and fostering the conditions necessary for economic growth. Worrying about income inequality should be a secondary concern, if it is a concern at all. Why? Because only societies experiencing strong economic growth can lift the poor out of a life that is all too often nasty, brutish and short.

The Role of Technology

Technology fits into this picture in an interesting way. While there needs to be much more economic research done before any conclusions can be drawn, some have argued that technological advances (and globalization) exacerbate income inequality in part because the better-educated and already well-to-do are uniquely poised to benefit.

Naturally enough, no one likes scenarios where the rich do a whole lot better than the not-rich. But experience shows that such concerns should be irrelevant. Economic growth and technological progress -- regardless of their effect on income inequality -- are the only hopes for the world's poor.

Proponents of so-called "sustainable development" as well as opponents of globalization would do well to bear in mind the singular importance of growth. A first step would be for them to absorb Xavier Sala-i-Martin's ground-breaking research. If they do, rather than setting up blockades to growth in the name of preventing inequality, they might work to spread technology and knowledge in ways that spur an even larger global middle class.

URL Next Door -- Much of the data used for this piece came from the research of Xavier Sala-i-Martin whose vanity home page is this week's URL next door. An interesting trend since the advent of easily programmable web pages has been the proliferation of individual academics' sites. His is the best I've seen so far of the interesting quirky, entertaining, informative, and weird web pages built and maintained by scholars.

 

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