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Inequality: diffusion and convergence

In this video Professor Derek Raine talks about how industrialisation spread across the world and affected distribution of income.
We saw that the Industrial Revolution began in Britain around 1780. The spread of industrialisation to the rest of the world was a slow process of diffusion largely dependent on trade and communication. We’ll look here at the way in which the spread of industrialisation led to differences in economic development. From Britain, industrialisation diffused across Europe in the course of the 19th century and early 20th centuries, and in North America and Australia. As these maps show, the process of diffusion was quite slow. But by 1914, most of Europe and the countries often referred to as the West offshoots– that’s to say North America, Australia, and New Zealand– were industrialised, but the rest of the world was not.
This map shows the current distribution of GDP across countries. We see the contrast in rather starker terms in this graph. Instead of country averages, it gives the global income distribution of people in 2011. The income levels have been adjusted for purchasing power. At currency exchange rates, the dollar value would be smaller than those shown. Notice that most of the world seems to be in the low income bracket. Globally, there’s no evidence of a large middle class. This graph also shows global income in 2011 according to region. It looks quite different. Every region seems to have its large middle income group or middle class. What’s the difference? It’s not just the regional disaggregation, it’s the horizontal scale.
On the previous slide, the scale was linear, so each step along the horizontal axis represented an equal increment in income. Here, the scale is such that each step represents multiplication by a factor. So for example, here, the step between $100 a year and $1,000 a year is the same as that between $1,000 a year and $10,000. The linear graph previously showed no middle class. This one, a rising middle class. Is one representation more truthful than the other? Depends on your values. Does an increment of $1,000 mean the same to a person earning $1,000 a year as it would to someone earning $10,000 a year?
Or does it mean more in the first case and less in the second even though it’s the same amount of money? If you think it means the same, you choose the representation on the previous graph. If you think it means less, you choose this representation. Statistics don’t necessarily lie, but they can be presented in different ways which are not value-free. If we look at how countries compare with the United States in terms of GDP per person, we see that in many cases, there is some catching up. The trend in the bars is an upward slope. But progress is slow. In fact, we’ve had recently a period of unprecedented convergence followed by a stalling of that progress.
Between 2000 and 2009, the rate of growth in the developing countries was 4.5% higher than that in the developed world. A rate of convergence that we would have seen the gap closed in less than a generation. Taking China out of the equation, at present rates, it will take over 100 years, perhaps 300 years to close that gap. But of course, these extrapolations assume we can continue to grow at these historical rates, which is what sustainable development is all about. There are other ways in which we can express this data. Instead of regarding it as a problem of too many poor people, it’s instructive to look at it as a problem of too few rich people. Here’s what I mean.
In the rich world, there are around a billion people with an average GDP per person of $35,000 a year. In middle income countries, such as for example Israel, the GDP per person is around $25,000 a year. For the rest of the world, the GDP per person is around $7,000 a year, that covers about five billion people in all. And the bottom billion, the GDP per person is very small– for these purposes, we can take it to zero. Suppose then, as a hypothetical experiment, we take $10,000 on average from the world’s richest billion and redistribute it. We have available about $10 trillion.
To bring our bottom billion up to the rest of the world level of $7,000 of GDP a year would require $7 trillion out of that country. To bring the bottom billion up to the middle income level would require $25 trillion– 2 and 1/2 times that amount we gained by taking down the top billion down to the level of a middle income country. To bring the rest of the world up to $25,000 of GDP per year, we take $18 trillion dollars a year, still much more than we have hypothetically available.
And the whole world to a level of a middle income country– not the rich world– to bring the whole world to a middle income country would require $43 trillion dollars a year. vastly more than our hypothetical amount. Now this is not an argument for doing nothing in the way of redistribution, but we can use it to illustrate how hard the problem is. Recall from week 2 that wealth comes from the flow of material and energy through the economic system. Our current flows are not sufficient for redistribution to bring every person on Earth to the current middle income. And yet, our current flows are unsustainable. This is one way of highlighting the great problem of sustainable development.

In the last steps we saw that reasons for England being the source of the industrial revolution were coal, steam power, canals, improvements in sanitation, growth of cities, intellectual property rights, and rule of law. Many economists would add the invention of joint stock companies which allowed much larger investments than could be funded by any individual.

In this video I talk about how industrialisation spread across the rest of the world.


  • Use this Excel Spreadsheet to see the effect of redistribution of incomes (The spreadsheet uses somewhat different data from that in the video based on individual incomes rather than country averages.)

  • The World Bank website allows you to download a spreadsheet of annual % GDP growth across various countries for the period 1990-2014. Use the data to plot the development trajectory of a country of your choice.

Discussion activity

In the video we showed the distribution of income on linear (additive) and logarithmic (multiplicative) scales. Which do you think is more appropriate?

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