Development

The World’s Divergent

At work we frequently use GDP per capita as a point of reference for a given developing country’s status. I’ve almost taken the measure for granted, until I remembered that the U.S. has a GDP per capita that’s not just higher–it’s significantly higher than in other developed countries. 

Rank Country GDP/capita (PPP)
11  United States 57,436
18  Germany 48,111
22  Canada 46,437
24  United Kingdom 42,481
25  France 42,314
27  Japan 41,275
32  Italy 36,833

That’s right, nearly $10,000 higher a person. This would appear to violate the law of convergence; that is, all else equal and given open capital flow, two countries should converge to the same level of income per capita (well, more specifically, that poorer countries should grow faster). Now, convergence notoriously fails to materialize between developed and developing countries, but one would think that there’d be some evidence of it among developed countries.

gdp_capita.PNG

That doesn’t appear to be what’s happening here. The U.S. appears to have maintained a consistent lead over the other G7 countries for decades. (And they say we don’t win anymore.) In the terms of that dystopian YA novel-turned-film, America’s a divergent, an individual observation so different from the others it can’t be categorized.

There are a number of explanations here.

America jumped to a huge productivity lead early last century by developing a resource- and capital-intense, high-throughput style of manufacturing producing mass market goods. The fractious, class-riven European continent struggled to copy this technology, and while adoption of these methods eventually led to a period of rapid catch-up growth, the process of catch-up was never quite completed.

Without delving too deeply into this, we could explain the difference intuitively 1) the size of the U.S. market; 2) major centers of talent, technology, and finance; and 3) a system that promotes productivity and penalizes anything that doesn’t. We can confirm #2 by looking at states by GDP per capita. The top two (excluding the rich AF Washington, D.C.) are New York ($75,360) and Massachusetts ($74,564)–i.e. where New York City and Boston are located. (California has Silicon Valley, but the average for such a large state takes into account a lot else.) There’s a lot in #3, but it includes things like profit and work incentives, the legal system, etc.

What does this imply for developing countries? First, that large countries may have an advantage. Perhaps China and India have potential GDP per capita as high as America’s. Second, it helps to have a couple of alpha cities important to the global economy (note the UK and Japan have only London and Tokyo, while the U.S. has at least three). Third, ruthless capitalism that creates high productivity (or more work hours) can lead to a sustained advantage over other economies.

Whatever the factors, even as countries develop, they may not be heading to the same place. The gap between the U.S. and the U.K., though they have similar systems and financial and labor flows have only been made easier over time, has not shrunk. On top of that, the U.S. is projected to grow faster than other developed countries. That rules out plain convergence, though not “conditional” convergence–however, at this point convergence is conditional on so many things the concept is nearly useless, making this a case where I’d dump theory in favor of cold, hard facts.

Obviously high GDP per capita doesn’t describe the whole situation. I’ve walked in plenty of places in America that don’t feel like $50,000+ or even $25,000 for that matter. Inequality and human health are left out of the equation. Income per capita is just income, and an average at that.

How countries actually get to high average income per capita–that’s the topic of the next post.

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