Incomes Around the World
Sustainable development we’ve seen has three major aspects, economic development, broad-based inclusion and environmental sustainability, all supported by good governance. But what do we mean by economic development? I want to introduce the main concept of how we measure economic development. Of course, there are many different aspects of a true and proper understanding of economic development, but we tend to use a short hand, and that is called the gross domestic product of a country. The gross domestic product has three words and three concepts in it. It means the total production taking place within the geographic boundaries of a country in a given year, so the gross of the gross domestic product means you’re measuring everything that is taking place within the country. You’re not taking into account in that measurement the depreciation of capital and so forth which would give us a different concept called net domestic product. Domestic signifies the fact that we’re talking about a geographic area, and we’re concerned with how much economic activity or production takes place within the boundaries. Of course, usually we’re talking about a country, but we could be talking about the production of a city or a region. And sometimes of course, we also want to talk about the gross world product which is adding up the domestic production across all of the countries of the world. And product, or production, signifies the fact that what we’re interested in measuring is not the accumulated wealth, the wonderful buildings and monuments and roads and infrastructure, the natural beauty, of a country, which may tremendously raise the quality of life. We’re interested in the actual flow of production in a given time period. Now, for most purposes we look at a year, though when policy makers are trying to understand short term dynamics of unemployment and production, they’re interested often in measuring the gross domestic product even over a quarter of a year. We’re going to look at national measurement or countries. We are going to look at the annual measurement. Now, one more critical point about measuring the gross domestic product. In general, we are interested in getting a sense of the standard of living of a country, and to do that we take the total production in the country over a given time period, usually the year, and divide it by the population so that we’re interested in the gross domestic product per person, or per capita. Why is that? Well, of course, larger countries produce more because there are more people. There are more workers, but if we simply were to compare countries in terms of the total production, we’d find that highly populous countries would have higher production but we wouldn’t learn very much about whether the living standards of those larger countries is really higher than the living standards of a small country, which may produce a little bit but quite a bit for each person in the economy. So when we think about economic development, we tend to think about the gross domestic product per person. Let me emphasize again. That’s not really a comprehensive measure of economic development. We want to know whether people are healthy or not. We want to know levels of education. We want to know other indicators of well-being, but as a shorthand, when I want to get a sense of a country’s overall level of economic development, I start by looking at the gross domestic product per person because it’s going to be a pretty good indicator of where things stand. And indeed that’s what the keeper of the accounts, which is the World Bank, does. The World Bank keeps very systematic tabulations on gross domestic product per person, and it classifies countries in a way that is also extremely helpful for us. The World Bank gives three categories of countries, high income countries, middle income countries and low income countries, and it puts each nation into one of those three bins, depending on its measured gross domestic product per person. Roughly speaking, a low income country is a country where the domestic production per person is at a level below a threshold of about $1,000 per person per year. In other words, roughly $3 per day, and a middle income country is a country that is in a band between $1,000 roughly per person and about $12,000 per person per year. And the high income countries are countries that are above the $12,000 per person threshold. There are then refinements. The middle income group which is quite a big one, is divided between the upper middle income and the lower middle income, with the dividing line of about $4,000 per person per year. The World Bank categories provide us with a, a useful depiction, a, a good map of the world, and if you look at the map in front of you, you can see that those few areas that are shaded blue are the high income countries, the US and Canada, Western Europe, Japan and Korea, Australia, and New Zealand, and a few other parts of the world. Add up the population of that high income group, and you find that it’s about 1 billion of the roughly 7 billion people on the planet. So it’s about 1 in 7 in the world, roughly 15% of the world’s population living in high income countries. Then take a look at this large middle group of beige colors, and you see that that covers a wide expanse of the world. And indeed 5 out of 7 in the world’s population, roughly 5 billion of the 7 billion people on the planet, are in the middle income category. So that’s a big middle, and that’s divided between an upper part and a lower part, roughly half and half. Approximately 2.5 billion people in the upper middle income category and about 2.5 billion in the lower middle income. Then look at the countries shaded red. Those are the poor countries, the low income category, and by simple arithmetic, we can say that 7 billion minus the one in the high income, minus the five in the middle income. That leaves about 1 billion people approximately living in the low income countries. We’ve already noted that the low income countries are heavily concentrated in tropical Africa and in South Asia, with this scattering of low income countries in other parts of the world, but in our world today, the poorest countries in the world are concentrated in these two regions, and most of the world’s poor people therefore live in those regions where the countries are in the low income category. Now, let me mention one more category. It’s not a World Bank category.
It’s a United Nations category but also very important for us to remember. Even within the low income countries, there are distinctions. There’s a subgroup within the low income countries that’s in pretty desperate shape. Not only are they poor, but the human conditions of disease, of education levels, of social instability, are very bad. And moreover this subset of countries is highly vulnerable to droughts, to floods, to conflict, to, to violence. So these are a group of highly vulnerable, very poor countries, and the UN has classified them as the least developed countries. There are about 50. Right now the list is 48 but it goes up and down depending on how countries are performing. Among the least developed countries, the poorest of those are again heavily concentrated. You see that in tropical Africa there’s a large number of least developed countries. There are several in Asia, and if you look closely at the map, you’ll notice something very telling for us. Afghanistan, Nepal, Bhutan, Laos, landlocked countries. This is not by accident. We’re going to see that economic development depends on international trade. Being landlocked is a problem. You’ll also notice a number of small island economies in the Pacific, and also Haiti. Small island economies also can be quite vulnerable and part of the least developed countries. We know what these categories look like. Intuitively it’s good to remember London and my own hometown New York City among the high income countries. Middle income countries, io or San Paulo in Brazil, where you have a tremendous amount of development and wealth, but you also have the foreign, the slums. Countries that are in the middle of the pack often doing very well in raising income levels. China, another major world economy that is a middle income country. The poor countries, we know what they look like also because they’re more rural. Small holder farmers. Peasant farmers scratching out a living and hardly making ends meet. And for the least developed countries, Somalia, unfortunately in its tragedy in recent decades really a clear example of what it means to be among the poorest of the poor and not only desperate poverty, hunger, lack of education, low life expectancy, but lots of violence and lots of political instability as well. Let me mention one more important detail for us in terms of measurement. For everything that I’ve said so far in measuring the gross domestic product, the total production is added up and divided by population to get the gross domestic product per person, and since countries have their own currencies, they have to be converted to a common standard. And so the exchange rate is used to convert the national currency into a common, typically U.S. dollar standard, and that’s how we make the comparisons in a common currency. But there’s another translation that can also be useful. I want you to be aware of it because we will be referring to it many times, and that is to make one more adjustment for the difference of costs or prices in different countries. If you buy an automobile or a television set almost anywhere in the world, price will be fairly similar because these are goods that are traded internationally, and they have a similar price when expressed in dollars in any part of the world. But if you go to rent an apartment or get a haircut or go to a movie or park a vehicle in the center of town, you’ll find the difference in costs extraordinary. In London or in New York or Tokyo or Paris, the prices would be sky high, but in a poor setting in Mogadishu or in Akrah or in, Bamako, Mali, the price of a haircut might be a 20th or a 50th what you’d, pay in a salon in Paris. So one has to take into account that simply measuring the output and converting to dollars might not give a full comparison because the purchasing power in a poor country might be a little bit higher than is indicated, so we often make one more adjustment called purchasing power adjustment, or purchasing power parity to take into account the relative price levels. When you do that you find that poor countries are still quite poor, but they’re not quite as poor as they look. Take a case of a country like Malawi, a poor country landlocked in tropical Africa. Measured in the market prices and market exchange rate, its per capita income is around $250 per person per year compared with $50,000 per person per year in the United States. Malawi’s extraordinarily poor. Adjust for the lower costs of living in Malawi, and you find that Malawi’s still very poor, but maybe the income with the purchasing power adjustment should be around $900 to $1,000, roughly 4 times higher than simply using the market prices. So thats a system called purchasing power parity, measures of gross domestic product per person. It’s a lot of words. It’s a lot of concepts. The main point that I am stressing is that we measure economic development in short hand by the gross domestic product per person. We adjust obviously for population. We adjust for currency, and very often we want to adjust for the different price levels. Then, we can classify countries, and we can study the question, why are countries at different levels of development? How do those different levels of development relate to other things that matter a lot for people, their health, their well-being, their happiness, and what can countries do that are at the low end of this curve, the least developed countries and the low income countries, to raise their living standard to achieve economic growth, that is a rise of gross domestic product per person? Fast enough to narrow the gap significantly with the wealthier and the higher income countries. That of course is one of the key challenges of sustainable development.