Divergence, Big Time

Lant Pritchett

By
Hassaan Allahwala
Umer Haroon
Divergence in relative productivity levels and living
standard is the dominant feature of modern economic
history. In the last century incomes in the less
developed countries have fallen far behind those in the
developed countries, both proportionately and
absolutely.
Developed countries growth rates have been
remarkably similar and the poorer member of the
group grew sufficiently faster to produce considerably
convergence in absolute income level.
Developing countries growth rates are slower than
the richer countries, producing divergence in relative
income among this set of countries
The discussion of convergence and long-term growth
has always been plagued by the fact that the sample of
countries for which historical economic data exist has
been assembled into convenient form” meant by the
period of 1870. The date is chosen because there are
nearly complete national income account data for all
of the now-developed economies since 1870.
There is strong convergence in per capita income withn this set
of countries
Even the poorer countries grew faster than the richer countries
did, the narrow range of the growth rates over the 1870 period is
striking. The United States, the richest country in 1960, had
grown at 1.7% per annum since 1870, while the overall average
was 1.54. Only one country , Australia grew either a half a
percentage point higher or lower than average, the standard
deviation of the growth rates was ony 0.33.

These facts are true for the advanced capitalist countries.

However the convergence and long run growth has always has
always been plagued by the fact that the sample of countries for
which economic data exist(and has been assembeled into
convenient and comparable format) is severely
nonrepresentative.
Calculating a Lower Bound For Per capita GDP

This selectvity problem raises a difficult issue in trying

to estimate the possible magnitude of convergence or
divergence of the income since 1870.
It was concluded that $250 is the lowest GDP per
capita could have been in 1870. This figure can be
defendendend on three grounds.
i. No one has ever observed consistently lower living
standards at anytime or place in history
ii. This level is well below extreme poverty line
iii. At a lower standard of living the population would
be too unhealthy to expand.
The first criteria for a reasonable lower bound on GDP per
capita is that it be a lower bound on measure GDP per capita,
either of the poorest countries in the recent past of of any
country in distant past. The lowest five year average level of per
capita GDP reported for any country in the penn World Table
is P$275 for Ethopia in 1961-1982. The countries with the lowest
level of GDP per capita ever observed even for a single year, are
P$260 for tanzania in 1961, P$299 for Burundi in 1965 and
P$220 uganda in 1981. Maddison gives estimates of GDP per
capita of some less developed countries as early as 1820. P$ 531
for india , P$ 523 for china and P$ 614 for indonesia. His earliest
estimate s for Africa begin in 1913: p$ 508 for Egypt and p$ 648
for Ghana.Maddison also offers increasingly speculative for
western European countries going back much further in time
he estimate GDP in the Netherland and the UK were $1515 and
p$992 respectively. On this score , P$250 is a pretty safe bet.
A complementary set of calculations to justify a lower
bound are based on subsistence income.

Poverty line: Lowest defensible poverty line based on

achieving minimally adequate consumption
expenditure is $250 per person per year. If we assumed
that personal consumption expediture is 75% of GDP
that mean income is 1.3 times the median, then even
to achieve median income at the lowest possible
poverty line require a per captia income f $437
An alternative way of considering subsistence GDP per
capita , begin with the finding that estimated average
intake per person per day consistent with working
productively is between 2000 to 2400 calories. Based
the cross-sectional regression using data on incomes
the predicted caloric consumption at $250 is around
1600. Some lowest level of caloric availibility ever
recorded in the FAO data for various countries 1610
calories per person in somalia in 1975; 1550 calories
during famine in Ethopia; 1586 in china in 1961. It
reveals that all of the episodes of average daily caloric
consumption below 1600 are associated with nasty
episodes of natural or man made catastrophe.
DIVERGENCE BIG TIME
 Divergence has been there in the last 150 year

 if there had been no divergence then income of the

poorer countries would have grown in proportion to US

 Income of the US grew about four-fold during 1870-1960

 42 of the 125 countries have income less then 1000(not

four times of US)
CONSIDERING ALTERNATE SOURCES
OF DATA
 No relevant estimates of the gdp for the less
developed countries

 however whatever data is present accounts for massive

divergence

 Maddison reports data for56 countries

 This data is not representative of the poor countries

 Data for Africa is very sparse

 Though figures show lower growth for less developed

countries then for developed countries

 Some economists argue that incomes of developing

countries were higher then developed in the past.
 Hanson argues that adjustments of comparisons from
official exchange rate to purchasing power equivalents
imply that developing countries were richer then
developed in the past

 Bairoch argues that there was no gap btw now developed

and developing countries till 1800

 According to their estimates growth of developed world

is 1.5 % btw 1870 -1960 compared to .5 % for the
developing world.
POVERTY TRAPS AND CONVERGENCE
 Divergence is not the thing for the past

 Some countries are catching up with high growth

whie some are still stagnant

 Assumption for explosive growth 4.2 % per annum to

the US level of 1960

 out of 108 countries 11 have growth rates of over the

benchmark
 Prominent are korea(6.9) .Taiwan (6.3) and indonesia
(4.4%)

 Some countries that were poor in 1960 stay stagnate

 16 developing countries have negative growth rates

 More then 40 developing nation had growth rates of

less then 1 %
 CONCLUSION
 A modern economist Gerschenkron popularized the
idea of “ADVANTAGE OF BACKWARDNESS”

 Countries behind the technological frontier to grow

rapidly

 But historically the examples are rare

 There are always some potentials for growth and

stagnation in poorer countries
 Any theory that unifies world`s experience with
economic growth must address four questions.

 What accounts for per capita growth and

technological growth.

 What accounts for few countries to grow significantly

over their leaders
 What accounts for why some countries lose the path
of rapid growth
 What accounts for why some countries stay in low
growth periods for a long time.

 Theorizing about economic growth and its relation to

policy needs to tackle these questions.