The Whole World Is Getting Richer, and That's Good News

Photograph by eStock Photo

This month the most accurate source for global data on the size of the world’s economies got a makeover. As a result, we have measures of economic growth and relative income across countries that are better than ever. These numbers suggest something surprising: a world of ubiquitously increasing wealth, where predictions of Malthusian traps and permanent poverty look increasingly archaic.

The Penn World Tables, created by Alan Heston, Robert Summers, and Bettina Aten at the University of Pennsylvania, were the first serious attempt to properly measure relative economic size around the planet. The researchers tracked the value of goods a country consumed, invested in, and traded using numbers that could be compared around the world and over decades.

This is a deceptively simple question. First, it requires comparing how much the same thing costs in different countries. That’s reasonably straightforward when it comes to such standard products as an iPad or an apple (the fruit). It is a lot more complex when it comes to services such as a restaurant meal, a taxi ride, or tailoring. In poorer countries, labor costs less, so the same level of service costs less, too—and your dollar (or rupee) goes further.

Second, it requires comparing what people are buying. The household subsisting on $2 a head in rural India doesn’t purchase the same products as a family living on 10 times or more in the U.S. The Penn Tables have to make an approximation of relative income based on the average of what people buy across countries. Finally, the new measure involves comparing across time. That takes valuing the goods available at different dates against each other—a 2010 Ford Escape against a 1980s Ford Escort, as it might be. Once again, people don’t buy the same stuff over time. The average American buys fewer spats and bustles than he or she used to but a lot more consumer electronics. The Penn Tables try to account for that change, too.

Any time economists compare incomes in different countries and years, they are making a raft of assumptions and calculations around these three issues—there is no one right answer on how to do it. But the Penn World Tables is the best effort we have, and the new version makes it better. In particular, it uses data on prices back through history in a way that makes incomes over time far more comparable across countries.

It is no surprise that the revisions and updates have shifted economy sizes. According to the Penn World Tables, China’s expenditure-side GDP was $10.1 trillion in 2010. Under the old methodology, it was between $9.3 trillion and $9.8 trillion; the latest World Bank 2010 GDP estimate for China is $9.1 trillion. U.S. GDP was $13.1 trillion in 2010, according to the Penn World Tables.

The good news for America-firsters: According to the new estimates, China’s economy was still smaller than the U.S.’s in 2010. The bad news: China was somewhere between $300 billion and $1 trillion closer to overtaking the U.S. than we thought. The worse news: If the growth rates of 2000-10 reported by the Penn Tables continue until 2020 for each country, China’s GDP will be $23 trillion compared with the U.S.’s $15 trillion. If China’s economy isn’t already the largest today, it is probably a matter of months, not years, before it rises to the top.

But more importantly, the new data reveal how much larger all the word’s economies have become over time. The Penn Tables provide GDP data for both 1960 and 2010, providing a 50 year window to view global economic progress. It has been considerable. Looking at absolute GDP, no country anywhere in the world for which we have data is smaller today than it was in 1960. The countries that saw the size of their economies less than double since 1960 contain just 80 million people—a little more than 1 percent of the planet’s population. A further 1 billion people lived in countries where GDP climbed by somewhere between two- and fivefold. That leaves 4.9 billion people—the considerable majority of the planet—living in countries where GDP has increased more than fivefold over 50 years. Those countries include India, with an economy nearly 10 times larger than it was in 1960, Indonesia (13 times), China (17 times), and Thailand (22 times larger than in 1960).

Around 5.1 billion people live in countries where we know incomes have more than doubled since 1960, and 4.1 billion—well more than half the planet—live in countries where average incomes have tripled or more. Nearly 2.2 billion people are in countries where average incomes have more than quintupled over the past 50 years. This includes the citizens of China, Japan, Egypt, and Thailand—all of whom have seen around an eightfold increase in average incomes since 1960.

Such long-run growth rates are unprecedented. Compare the crucible of the Industrial Revolution: Between 1820 and 1870, U.K. GDP per capita increased from $1,706 to $3,190, according to data from Angus Maddison. That’s an increase of 87 percent. If the U.K. had seen the same performance between 1960 and 2010, it would place the country 34th lowest in terms of growth out of the 107 countries for which the Penn Tables have data. The U.K.’s 1820-70 income growth is weaker than the performance over the past half-century of such countries as the Philippines, Zimbabwe, and Syria—rarely thought of as economic powerhouses.

Nearly 1.7 billion people planet-wide live in countries where the average income per capita was above $10,000 in 2010. That’s above the average income in France, Germany, the Netherlands and Belgium in 1960. And more than 3.5 billion people worldwide—around half the planet—live in countries with a 2010 average income of $6,000 or above according to the Penn Tables. That’s nearly as high as the GDP per capita of Italy in 1960 and above that of Ireland or Spain in the same year.

It is still the case that half of the world’s population lives on considerably less than one quarter of the U.S. poverty rate—and they undoubtedly need more money to enjoy a good quality of life. But there is a lot of good news in the new Penn World Tables. They confirm that traditional Malthusian fears of national output constrained by resources have absolutely no basis in reality anywhere. They also suggest that concerns over widespread ‘poverty traps’—where countries are condemned to penury and stagnation by centuries-old institutions or culture or genetics—are more a figment of economic theorists’ imaginations than major factors in real-world economic outcomes. Nearly all the planet has got a lot richer.  And there’s good reason to hope the Penn Tables update fifty years hence will suggest we don’t need the qualifier ‘nearly’ any more.