## Saturday, March 14, 2015

### Where is convergence?

A week ago I posted this table at Twitter and it received quite a lot of attention. It was perhaps one of my most retweeted entries.
As can be seen from the title, it shows when a country has for the first time reached its current (actually, 2013) GDP per capita level. Before I discuss it more, let me explain the logic of the calculation.

Suppose that you have a country with a steady growth: every year GDP per capita goes up by (say) 2 percent. Then in any given year GDP per capita will be at the historic maximum. (Incidentally, in 2013, only 84 out of 154 countries were at their historical peak income.) Suppose now that you have growth followed by a decline, something similar to what happened to transition economies in the 1990s or to Greece today. Then, of course, your income today will be less than your historical peak and your today’s income would be equal to what you have already achieved some years ago. This is why we see, for example, that Ireland has achieved its current level of income (income and GDP per capita  are used interchangeably) in 2003, that is twelve years ago. We can interpret the twelve years as a “lost time.”

Consider now the table more carefully. On top, with the lowest “lost time”, are the Euro countries that were most affected by the crisis: Ireland, Spain, Greece and Italy. They have lost between 12 and 17 years. Italy is especially interesting because its slump was not nearly as dramatic as Ireland’s or Greece’s; rather what happened is that Italy had both very sluggish growth and relatively small declines so its GDP per capita today is about the same as almost two decades ago. Greece, on the other hand, had a major expansion of GDP per capita between the mid-1990s and 2007, and then a huge slump, well known to everybody who cares to read the news. But it has “lost” (so far) less time than Italy.

Italy and Greece compared

Note: All GDP per capita amounts are in 2005 international dollars. Data are from World Bank World Development Indicators (various editions),

Next come Ukraine and Serbia (and I could have chosen quite a few other transition economies) that achieved current income levels some two generations ago. For both countries, transition to capitalism was a disaster. In the case of Serbia, it was due to the wars of the Yugoslav succession, UN trade sanctions (which crippled the economy), record-breaking hyperinflation, and finally, cherry on the cake, three months of NATO bombing (the total damage from which was conservatively estimatedat \$30 billion in 1999 prices). A slow recovery after 2000 was interrupted by the global financial crisis. Ukraine is a well known case of a country unable to create any institutions, with kleptocracy run amok, squabbling politicians, and an obsolete manufacturing sector that lost most of its  markets in the dissolution of the Soviet Union.  And now a war. If we incorporate 2014 decrease in Ukraine’s GDP per capita,  and also the projected 2015 further decline of 6  percent, by the end of this year, Ukraine’s per capita income would have regressed to the 1974 level.

Ukraine and Serbia compared

Next come two oil-producing countries, Saudi Arabia and Venezuela, with a loss of between 40 and 50 years. Their fortunes are, to some extent, hostage to the  vagaries of oil prices (and domestic oil output),  but the lost time also illustrates  the failure of the economic polices: inability to diversify the economy so that it does not move from boom to bust, and more recently in Venezuela disastrous policy mistakes. The decline of Venezuela is best compared with its neighbor Colombia  (which of course had some political problems, to put it mildly, of its own but has recently registered strong growth). The interesting part is that Venezuela reached its current GDP per capita level first in 1964, then reached it again in 1980, then yet again around 2007. Basically, its GDP per capita has been constant, at around \$15,000 international dollars, for more than 60 years.

Venezuela and Colombia compared

We then come to the real disasters which are mostly in Africa. Ivory Coast, which lost half-a-century, illustrates high dependence on raw material exports (cocoa) and the costs of the civil war. Zimbabwe and Haiti (the only non-African country  in this group of signal failures) present an exceptional problem in that their today’s income is lower that at the time of independence (for Zambia) or at any time for which we have GDP per capita data. So we cannot be sure if their lost time is some 60 years or even more.

The same is true for Madagascar and DR Congo, countries that have suffered for more than 50 years chronic political instability, wars, international interference (Congo), and disastrous economic policies. Their today’s income levels are also less than at the time of independence and most likely equal to what they were one hundred years ago. So they truly lost an entire century.

What this short excursus into growth experience of various countries shows  is that income convergence, so well illustrated by “resurgent Asia” is far from universal. (This is a different topic, but unconditional convergence vanishes if you exclude Asia.) Also it shows that Africa’s deep underdevelopment, to which many people have gotten used as it is were a permanent condition,  is somewhat of a recent phenomenon. Surely, Africa was always (at least since we have historical records) poorer than Europe but as recently as 1960, the gap between the average GDP per capita in Africa and WENAO countries (Western Europe, North America and Oceania) was 1 to 6. It is now 1 to 9.

Or take another, perhaps extreme, example. In 1974 when Muhammad Ali went to Kinshasa for his “rumble in the jungle” DR Congo and Indonesia had exactly the same GDP per capita, around \$2,000. Now, Indonesia’s GDP per capita is about to reach \$10,000, and Congo’s is down to \$500. The gap is now 20 to 1, in a span of two generations.

Second, the discussion  highlights the failure of the transition to capitalism to deliver the “goodies” in many countries,  a topic on which I already wrote

It shows that European countries most affected by the Euro crisis lost a decade or two, which in comparison with the other debacles listed here, does not seem much, but still represents a loss of an entire generation.

Finally, it is noticeable that, other than for Venezuela, no South American country appears on the list. The reason is that South America had a particularly good spell of growth in the last decade and all countries but Venezuela are now at their historical income peaks.