Adam Smith & Inequality: Inequality Generated Outside the Market



Outside of the charmed magic circle of western and central Europe, North America, and the other Anglo-Saxon settler colonies, few indeed are the economies that have managed successful economic development in the sense of convegence: materially closing any significant fraction of their productivity and living standards gap vis-a-vis the world's economic leaders. The Northeast Asian Pacific Rim, now including China; further south, Malaysia, Thailand, Indonesia, and Vietnam; India and Sri Lanka; elsewhere, Turkey, Chile, Botswana, Mauritius, and Cabo Verde. That is all. And with perhaps one or two exceptions, those few have followed the particular economic development path of using low-wage manufacturing exports to nurture their domestic communities of engineering practice—a path that is now closing.

It has long been easy to see the glass half-full with respect to global economic growth: technologies and organizational forms can be imitated and adopted, do diffuse, and even the poorer parts of the globe are much richer than they were two or one or even half a century ago. It has been much harder to see the glass half-full with respect to convergence: the catching-up and closing of the gap vis-a-vis the world's industrial leaders. Why have so few countries been able to walk the path? And what are our prospects for the future? With the prospective closing of the standard parth for convergence, seeing the glass half-full is becoming harder: perhaps there will be no glass at all.

But by now you have three questions:

  1. What, since the start of the industrial revolution, has been the standard path to successful economic convergence?

  2. Why is this path now closing?

  3. What might the alternatives be?

Let us tackle these in order. But, first, the elevator summary:

  1. Since the start of the industrial revolution, successful convergers have possessed functioning property-rights systems and markets with reasonably honest governments, and have succeeded in teaching citizens, in building infrastructure, in mobilizing savings and directing it productively via banking, and in implementing smart industrial policies. What are "smart industrial policies"? They have been, historically, those that borrow the global middle class as a source of demand for domestically-produced manufacturing and as a way of judging which domestic producers are effective, and on that foundation build the communities of engineering practice essential to transfer knowledge of how to produce using industrial technologies.

  2. Historically, walking this path has been possible because industrial manufacturing has required enormous amounts of low-wage labor in addition to capital and engineering expertise. Thus the free-market production cost disadvantage of poor economies in the "low end" of modern machine-made industrial products has been modest, and modest well-designed tariffs coupled with affordable subsidies for successful machine-made manufacturing exports can tip the balance and allow this borrowing of the global middle class as a source of demand and of judgment. The successful path to development and convergence has thus led through nurturing infant industries in low-end machine-made manufactures. But now robots and software 'bots mean that industrial manufacturing no longer requires much unskilled labor; the cost disadvantage at world market prices is no huge; and the path is rapidly closing.

  3. We do not yet know what the new path will be, or even if there will be a new path. So what we need to do is to explore, as rapidly and as thoroughly as possible, possible new paths. And then we need to reinforce success.


The Historical Pattern of Convergence

The standard estimates you will find in places like tell us that, measured in today's dollars, the geometric mean income per capita in the world in 1800 was about 1000 of today-value dollars a year—3 dollars a day. By 1870, perhaps 1300; by 1945, roughly 2300; and today, roughly 10000, more or less Egypt now. That is enormous progress: a tenfold jump in a little over two centuries. But look at the top tenth of the world: it goes from 1800 to 3600 to 10000 to 45000 dollars of real annual income per capita from the year 1800 to 1870 to 1945 to today. And it is composed of about the same economies throughout—Japan, South Korea, and Taiwan have joined; Middle East oil-producers have joined; Argentina, Uruguay, and Venezuela have dropped out; but that is about it. The top tenth as a multiple of the geometric mean has thus gone from 1.8 to 2.8 to 4.3 to 4.5: divergence. Convergence to the world's economic frontier has been a rarity. Growth but growth that leaves the non-rich economies further behind in relative terms has been common.

Which economies have managed to break the mold? What are the economies that are unexpectedly very rich today—the economies that have been the surprise big winners in economic growth and development in the three quarters of a century since World War II? They are: Japan, Singapore, South Korea, Taiwan, and Hong Kong. That is all the surprise winners: all the other of today's rich countries either had lots of oil and small populations; or as of 1945 were in the prosperous "North Atlantic", with institutions, markets, and trade and cultural connections that meant they would be lifted by the rising tide, and so their success does not come as a great surprise.

What are the countries that are unexpectedly middle-income today—the countries that were much poorer, relatively, back in 1945 but that now are doing quite well in global perspective? They are: Turkey, Chile, Malaysia, Botswana, Thailand, of course China, and Mauritius—a relatively small island of 800 square miles. That is all.

What are the countries that are still poor today, but that are unexpectedly much less poor than would have been predicted back in 1945? They are: Indonesia, Sri Lanka, India, Bangladesh and Cabo Verde—ten small islands totalling 1600 square miles. That is all.

Otherwise—with the important exception of the "converging" North Atlantic—countries' economies have either sharply declined in relative terms, or stayed where they were, with the proportional gap between their labor productivity and that of the United States not much less than it was in 1945.

Call these 18 economies—Japan, Singapore, South Korea, Taiwan, Hong Kong; Turkey, Chile, Malaysia, Mauritius, Botswana, Thailand, China; Indonesia, Sri Lanka, Vietnam, India, Bangladesh and Cabo Verde—and call them the "convergers": those that have figured out how to take advantage of the global economy and society to become rich, or richer. On the upper left hand the glass is half empty: these are only 18 of some 180-odd middle- and low-income developing economies and emerging markets worldwide. On the lower left hand there is barely any water in the glass at all: of even those countries that are converging, only a fourth have attained North Atlantic levels of prosperity and productivity. On the lower right hand the "convergers" may be only 18 economies, but they account for half the population of the earth. And on the upper right hand the experience of the "convergers" breaks a trail and provides examples for other still-poor nations to follow.

Or does it?

I am here to tell you that—in all likelihood—it does not. The pattern of human work is changing, rapidly. And the pattern of human work is changing in a way that is closing off the standard path to economic development and prosperous productivity that Bangladesh has started to walk, that the others up to Japan are walking or have walked since World War II—and that others like Germany and the United States had walked previously—is now closing. How fast it will close, and what alternate trails still-poor economies can walk, is up for grabs. But the standard path is closing.


The Changing Pattern of Human Work

[An here I have run out steam for the moment...]

#economicdevelopment #economicgrowth #economics #globalization #notetoself #riseoftherobots #2019-11-26