DannyQuah

Making large things visible to the human eye

Category Archives: poverty

How we miss the Great Shift East

Many well-known facts are, in actuality, false. One such is how the Great Wall of China is humanity’s only construction visible from outer space.  Another is how Marie Antoinette said, “Let them eat cake.”

The Great Shift East, 1980-2050

The Great Shift East, 1980-2050

Conversely, many facts actually true are obscure and misunderstood. For some of these facts, that fate is perhaps well-deserved, as a number of scientific truths cannot even be stated in everyday language. Certain other facts that nearly everyone considers obvious or well-known have boundaries that are indistinct and, as a result, unhelpfully permit both hyperbole and scepticism. One of the goals of research should be to map out those boundaries, so that both intellectual understanding and policy debate can be based on evidence rather than speculation.

The Rise of The East is one of those well-known but misunderstood facts. Sufficiently many books, newspaper articles, and TV programs have carried this meme to where hardly anyone can now plead ignorance of it. But enough ambiguity remains, so observers are free to project onto the idea both their best hopes and their worst fears. Not helpful in this regard is where characterizations of this Great Shift East — caricature, stylized, divorced from hard empirical evidence, insufficiently accurate — impersonate as fact. These simultaneously fan alarm, invite ridicule, and risk credibility.

A concrete and straightforward illustration of the Great Shift East is, therefore, both helpful and needed. “The Global Economy’s Shifting Centre of Gravity” provided just that in the clearest and most direct way I could write down. I am pleased that others — on a panel of scholars and practitioners both — think I have done a good job with the idea.
GPPN Best Article Prize

Considerable previous research had, of course, already been published on the empirics of economic growth. However, that more traditional research focused on countries’ per capita incomes—because that’s what theoretical models of growth sought to explain—and eschewed location, co-movement, and national identity, in favor of anonymized subscripts in a statistical cross section. By maintaining a discipline of empirical research only when driven by theory, arguably, economics took its eye off what really mattered in the shifting global economy, leaving that big picture instead to political scientists, international relations scholars, and investment bankers.

In some of my earlier work on the cross section of country growth, I was even told to take out economies like China or Singapore, because they were obviously outliers and unrepresentative. But being outliers and unrepresentative, it struck me, was exactly why they were interesting. While “The Global Economy’s Shifting Centre of Gravity” had a simple goal, it also got to bring back in all these other considerations of why the global economy needs to be understood as an entirety, not just as a bunch of economies taken in isolation. Otherwise, it was like trying to understand cloud formation by studying water molecules.

We now know that in a rush, the world went from being centred on the Transatlantic Axis, with BRICs merely a catchphrase, to where the BRICs conceit became a primary organizing principle for high-level international policy making, multi-trillion dollar portfolio investment, and geopolitical analysis. But, caught in that same rush, the 2008 Global Financial Crisis, significant although it already was on its own, provided tabula rasa for revisionist interpretation: The 2008 Financial Crisis morphed to be merely Transatlantic, rather than Global. The 2008 Financial Crisis reflected the Decline of The West, simultaneous with the Rise of The East. The 2008 Financial Crisis was caused by global imbalances resulting from Asian Thrift, i.e., East Asians’ newly endowed with the financial clout but not the political maturity to be responsible in their management of international trade.

As historical reality unfolded, so too grew fear, uncertainty, doubt, and pushback.  The German Marshall Foundation’s 2011 Transatlantic Trends survey found the majority of Americans reckoning Asia more important than Europe to their national interests, with the proportion rising as high as 70% among Americans aged 18-34. But the same survey also found that 63% of Americans viewed China as an economic threat, i.e., double the number who considered China an economic opportunity.

Dinner with Foreigners

Asians themselves remain sharply divided on the Great Shift East. On the one hand, thinkers like Kishore Mahbubani have long argued that the world’s policy-making has unhelpfully lagged a reality where the East is rapidly growing in importance. On the other hand, Eastern decision-makers have continued to look West for all levels of engagement. Powerful Eastern sovereign wealth funds remain enamoured of investment in locations around the Transatlantic Axis even as Western governments look back at them with suspicion. I know smart, articulate Singaporeans who turned down Ivy League universities to go instead to Beida, but a majority of Asians still more highly value education in the West, whether for the liberal arts training or the business and social connections. At a much lower level of financial commitment, the Wall Street Journal just this month described a dating agency that charged Chinese women US$600 to meet Western men who got to sign up for free (the ad actually said “Foreigner”, but few people I spoke to thought that included Indonesian or Filipino men). What Great Shift East when all the exports are just one way?

The political scientist and international relations scholar Joseph Nye speaks of nations having “soft power”, in contrast to the hard power of obvious economic or military strength. “Soft power” is the ability to convince others to want the same thing you want, without buying them off or threatening to shoot them. While economic power has indeed moved, the important tokens of soft power, and thus of geopolitical balance, remain firmly moored and continue to attract. Soon the economic center of the world will be 10 timezones east of where its political center remains. This misalignment is historically never propitious, whether geopolitical in the sense of Paul Kennedy’s Rise and Fall of Great Powers, or within countries where it often manifests in conflict between ethnic or religious groups.

The Great Shift East, therefore, is even more than usual a work in progress. Measuring it — making a large fact visible to the human eye — is just a first item of business.

No one likes inequality. Just try not to be poor absolutely as well. And don’t grow so fast either.

No one likes inequality:

US inequality and median income

I just like mine a lot less when it comes together with grinding poverty.  Just saying.

Chinese poverty and inequality - the 100 yuan cigarette lighter

Chinese poverty and inequality - the 100 yuan cigarette lighter

“Oh, also, this thing you’re doing – unbalancing the global economy, eclipsing the current global hegemon, frightening the horses – please, could you stop thinking about just yourself for a minute, and not grow your economy so quickly?  Thank you.”

(Actually, at market exchange rates, the average person in China remains poorer than his counterpart in nine countries across Africa, poorer than the average person in Belarus, El Salvador, or Jamaica.)

Who moved my BlackBerry… and those hundreds of millions of people?

China and India are, for now, the only billion-people economies. In one popular telling, China shifted hundreds of millions of workers from farms to urban areas. In that story that switch rate, paired with reasonable assumptions on relative productivities in relatively backwards agriculture and forward-looking manufacturing just about matches China’s overall growth rate, after factoring in other measureable progress.

A related not uncommon view further has it that India codes workman-like software, designs lower-end pharmaceuticals, answers queries about insurance claims over the telephone, and scans X-rays that Western doctors are too busy to do. These jobs might pay far less than done in the West but, in their part of the global marketplace, they almost surely pay better than stitching together textiles in Shanghai () or assembling refrigerators in Shandong Peninsula (山东半岛).

So, which economy has had its growth driven more by changes in labour input? Where have more people moved out of poverty?

The Figures (using data kindly provided me by Dale Jorgensen and Khuong-minh Vu that they had used in their paper “Information Technology and the World Economy”, 2006) show decompositions of Chinese and Indian growth into contributions due to physical capital, labour, and productivity (TFP). Earlier on, between 1989 and 1995, China certainly drew more on labour than did India to power economic growth and, true to stereotype, drew more on labour hours (“mere sweat and effort”) than on labour quality, i.e., on skills and human capital. But even then the difference was small.

By 2000-2005 the most recent period for which we have data, China had come to rely more on physical capital, i.e., on machines. Its reliance on labour had fallen to 13%, almost exactly half that of India’s. That shift occurred, moreover, with little loss in productivity’s contribution. Through both periods and in both countries, productivity never contributed less than 40% of growth overall.

By 2000-2005, in fact, China’s profile of growth contribution from capital, labour, and productivity almost exactly matched that of the US. The difference, of course, is that China has been growing at 3 times the rate of the US.

The next Figure (per capita income on the horizontal axis; hundreds of millions in $1/day-poverty) shows how China’s much, much more impressive aggregate growth has lifted half a billion people out of extreme poverty in the last quarter-century; India, on the other hand, has only recently and, by comparison, imperceptibly started along the same path. But with a long way to go still. The data are for 1984-2004; I had used them in a previous blog posting.

My own small contribution on global inequality the last couple months was extremely practical. I did what I could in charitable fundraising. The video shows my friend Maria Gratsova holding the board for an airbreak. I performed a jump spinning hook kick. This particular event was the LSE Development Society auction on 05 February 2008, and I was up on the auction block. Fortunately, someone did buy me – for much more than I’m worth. But the money went to a good cause and the deal was that we had a paid-for dinner together afterwards.

(Yes, yes, I know, boards don’t hit back but an airbreak means the board swings loose, and so is harder to break. And of course that they don’t hit back doesn’t mean they break everytime. In this next video [from September 2007] I attempted two boards on one jump and only broke one.)

Thanks to the kindness of friends, Maria and I held a repeat performance at LSE’s Malaysia-Singapore Students Night, 23 February 2008, in the Old Theatre. Money changed hands there too, and for just as worthy a cause. (This still is from LiEe Ng’s camera; thanks LiEe!)

Global balance and equality

In August 2007 I was part of the opening keynote panel discussion at the Singapore Economic Review Conference (and got to have lunch with LSE alumni and friends in Singapore).

I wanted to show the large forces that drive global inequality and poverty, those changes that affect, in one fell swoop, the quality of life for many of the 6.3 billion people on earth.

I have two candidates for massive worldwide change: First, economic growth; second, China. The graphic illustrates both.

(a larger dynamic animation can be invoked if the inline version above isn’t clear enough in your browser; or just click anywhere in the figure).

The vertical axis measures millions of people living on less than 1 US dollar a day (actually, the threshold is 1 International Dollar a day, but close enough). The horizontal axis is per capita income in the country or bloc of countries: Economic growth means movement rightwards horizontally. The size of a bubble measures the total population. EAP indicates East Asia and the Pacific Region; LAC, Latin America and the Caribbean; MENA, Middle East and North Africa; SAS, South Asia; and SSA, Sub-Saharan Africa. Additionally, China and India are given separately in the graphic.

The animation follows these continental groupings over time, from 1990 through 2004, and shows how as growth occurs, poverty falls.

In principle, if inequality within a continent or within China or India increased sufficiently with economic growth, then the corresponding bubble in the picture might well rise vertically. All that means then is that, in that case, even though average income increases with growth, inequality increases so overwhelmingly that the joint growth-inequality process grinds ever more people into ever greater bone-crunching poverty.

(To be clear, inequality does not have to increase with economic growth. But many people and quite a few economists think it might—hence the so-called tradeoff between equality and efficiency. The data do not speak very strongly on this, in either direction. But I think such a putative regularity is of little consequence for the point here.)

Almost uniformly, the graphic shows inequality is unable to rise enough to overcome the benefits of economic growth. As a matter of logic alone, of course, it might: an actual, large instance in the animation is China between 1996 and 1999: In that 3-year period the China bubble moved rightwards and upwards. So there’s nothing in the arithmetic that rules out the possibility. But it is unusual. As time proceeds, almost uniformly, the bubbles move southeasterly, shifting rightwards and dropping towards the floor. This is a very good thing. Economic growth reduces poverty.

In the animation, right at the start of the sample Eastern Europe and Central Asia (ECA) implodes leftwards, just as post-Communist transition began. But then after that pretty much only the rightwards movement is visible. Compared to China, that other 1-billion people economy India, up through 2004, still hadn’t done very much. Sub-Saharan Africa (SSA) all this time basically did nothing but percolate upwards: It didn’t grow and it saw vast numbers of its people fall ever further into grinding poverty.

In 1981 1.47 billion people on earth lived on less than 1 dollar a day. By 2004 that number had fallen to 0.97 billion, a reduction of half a billion. (If you don’t like these numbers, you come up with better ones. In economic research it takes a model to beat a model, so simply complaining that a model isn’t a good model or is unrealistic doesn’t get you very far. So too whining that an estimate isn’t a good estimate.) The animation shows that pretty much all of that worldwide poverty reduction is due to just … China.

Since this animation, like all digital goods, is infinitely expansible, I also presented it at a British-Malaysia Chamber of Commerce lunch and as part of a lecture at the British Council in Malaysia, both also in August, as part of Malaysia’s 50th anniversary celebration of its independence from Britain. (The animation is also on youtube and you can put a version on your cellphone if you like.)

The underlying data are from Chen and Ravallion (2007) “Absolute Poverty Measures for the Developing World” and from World Development Indicators (2006) online. Further analysis is in Quah (2007) “Life in Unequal Growing Economies”. Related discussion appears in Quah (2003) “One Third of the World’s Growth and Inequality”.

I generated the animation by

latex 2007.08-SERC-lug-dq.tex
dvips -pp 5-10 -o - 2007.08-SERC-lug-dq.dvi | ps2pdf - - | convert -delay 80 - 1-2007.08-SERC-lug-dq.gif

i.e., using standard tools latex, dvips, ps2pdf, and convert.

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