In the grip of a great convergence
By Martin Wolf
January 4 2011
Convergent incomes and divergent growth – that is the economic story of our times. We are witnessing the reversal of the 19th and early 20th century era of divergent incomes. In that epoch, the peoples of western Europe and their most successful former colonies achieved a huge economic advantage over the rest of humanity. Now it is being reversed more quickly than it emerged. This is inevitable and desirable. But it also creates huge global challenges.
In an influential book, Kenneth Pomeranz of the University of California, Irvine, wrote of the “great divergence” between China and the west. He located that divergence in the late 18th and 19th centuries. This is controversial: the late Angus Maddison, doyen of statistical researchers, argued that by 1820 UK output per head was already three times and US output per head twice Chinese levels. Yet of the subsequent far greater divergence there is no doubt whatsoever. By the middle of the 20th century, real incomes per head (measured at purchasing power parity) in China and India had fallen to 5 and 7 per cent of US levels, respectively. Moreover, little had changed by 1980.
What had once been the centres of global technology had fallen vastly behind. This divergence is now reversing. That is far and away the biggest single fact about our world.
On Maddison’s data, between 1980 and 2008 the ratio of Chinese output per head to that of the US rose from 6 to 22 per cent, while India’s rose from 5 to 10 per cent. Data from the Conference Board’s “total economy database”, computed on a slightly different basis, indicate that the ratio rose from 3 to 19 per cent in China and from 3 to 7 per cent in India between the late 1970s and 2009. The comparisons are uncertain, but the direction of relative change is not.
Rapid convergence on the productivity of advanced western economies is not unprecedented in the era following the second world war. Japan was the forerunner, followed by South Korea and a few small east Asian dragon economies – Hong Kong, Singapore and Taiwan. Japan had already begun to industrialise in the 19th century, with remarkable success. After its defeat in the second world war, it restarted at about a fifth of US output per head, roughly where China is today, to reach 70 per cent in the early 1970s. It attained a peak of close to 90 per cent of US levels in 1990, when its bubble economy burst, before declining again. South Korea started at 10 per cent of US levels in the mid-1960s to reach close to 50 per cent in 1997, just before the Asian crisis, and 64 per cent in 2009.
What is unprecedented this time is not convergence, but the scale. Suppose China were to follow Japan’s path during the 1950s and 1960s. Then it would still have 20 years of very fast growth in front of it, reaching some 70 per cent of US output per head by 2030. At that point, its economy would be a little less than three times as large as that of the US, at PPP, and larger than that of the US and western Europe combined. India is further behind. At recent rates of growth, India’s economy would be about 80 per cent of that of the US by 2030, though its gross domestic product per head would still be less than a fifth of US levels.
China is today where Japan was in 1950, relative to US levels at that time. But its output per head is far higher in absolute terms, since US levels have themselves risen threefold. Today, China’s real GDP per head is roughly where Japan’s was in the mid-1960s and South Korea’s in the mid-1980s. India’s are where Japan was in the early 1950s and South Korea in the early 1970s.
In short, today’s divergent rates of growth between successful emerging economies and the high-income economies reflects the speed of the convergence of incomes between them. This divergence in growth is staggering. In an important speech in November, Ben Bernanke, chairman of the US Federal Reserve, noted that in the second quarter of 2010, the aggregate real output of emerging economies was 41 per cent higher than at the start of 2005. It was 70 per cent higher in China and about 55 per cent higher in India. But, in the advanced economies, real output was just 5 per cent higher. For emerging countries, the “great recession” was a blip. For high-income countries, it was calamitous.
The great convergence is a world-transforming event. Today, the west – defined to include western Europe and its “colonial offshoots” (the US, Canada, Australia and New Zealand) – contains 11 per cent of the world’s population. But China and India contain 37 per cent. The present position of the former group of countries will not be sustained. It is a product of the great divergence. It will end with the great convergence.
This assumes that the convergence itself will continue, if not necessarily at recent speeds. The best response to those who doubt this is: why not? Powerful market and technological forces are spreading the stock of knowledge across the globe. No one doubts that Chinese and Indian people are capable of applying it. They are quite as entrepreneurial and driven as westerners. Being poorer, they are surely far more so.
Until recently, political, social and policy obstacles were decisive. This has not been true for several decades. Why should these re-emerge? True, many reforms will be required if growth is to proceed, but growth itself is likely to transform societies and politics in needed directions. True, neither China nor India may surpass US output per head: Japan failed to do so. But they are far away today. Why should they be unable to reach, say, half of US productivity? That is Portugal’s level. Can China match Portugal? Surely.
Of course, catastrophes may intervene. But it is striking that even world wars and depressions merely interrupted the rise of earlier industrialisers. If we leave aside nuclear war, nothing seems likely to halt the ascent of the big emerging countries, though it may well be delayed. China and India are big enough to drive growth from their domestic markets if protectionism takes hold. Indeed, they are big enough to drive growth even in other emerging countries as well.
In the past few centuries, what was once the European and then American periphery became the core of the world economy. Now, the economies that became the periphery are re-emerging as the core. This is transforming the entire world. What this means for us all will be the subject of next week’s column.