Economie del Centro-Est
The West and the Rest in the International Economic Order
The international economic order has changed in the last 40 years and will no doubt go on changing, as leading economist, Angus Maddison (OECD Observer, ) explains.
NB – This article is an adapted extract from Angus Maddison’s chapter, “The West and the Rest in the International Economic Order”, in Development is Back, OECD Development Centre, 2002.
NB – This article is an adapted extract from Angus Maddison’s chapter, “The West and the Rest in the International Economic Order”, in Development is Back, OECD Development Centre, 2002.
In 1962, we usually divided the world into three regions. The advanced capitalist group was then known as the developed world. The second was the “Sino-Soviet bloc”. Countries “in course of development” were the third world. The China-USSR split occurred in the early 1960s; most of the communist regimes collapsed around 1990, and the hostility of the cold war has largely faded away. The income gap between the former communist countries and the advanced capitalist group has become very much wider than it was. For this reason, a tripartite division of the world economy is no longer appropriate.
For rough comparisons, it is now useful to divide the world in two and compare developments in the advanced capitalist group with the aggregate for lower-income countries – designated as the “West” and the “Rest” in our tables. On average, the West increased its income per head fourfold from 1950 to 2001 – a growth rate of 2.8% a year. In the rest of the world there was a threefold increase – a growth rate of 2.2%. In both cases this was much better than earlier performance. From 1820 to 1950, income grew 1.3% a year in the West and 0.6% in the Rest. Though the gap in income level was still increasing, the acceleration in performance was bigger in the Rest.
Population of the West rose by half from 1950 to 2001 (0.8% a year), about the same pace as in 1820-1950. In the Rest, the situation was very different. Population grew by 2.0%, compared with 0.6% in the earlier period. This reflected a major improvement in welfare as mortality declined and life expectation rose from 44 to 65 years in 2001 – much faster than in the West. In the past two decades birth rates have fallen rapidly – a demographic transition which happened earlier in the West.
The West is now a relatively homogeneous group in terms of living standards, growth performance, economic institutions and modes of governance. Over the past five decades there has also been significant convergence in most of these respects. This is not true of the Rest. There are more than 180 countries in this group. They have nearly all increased their income levels significantly since 1950, but the degree of success has varied enormously. Most of Asia is experiencing fast per capita income growth. Most African countries are fairly stagnant. Most Latin American countries found it very difficult to keep a steady trajectory of advance in the 1980s and 1990s. Population growth is fastest in Africa, a good deal slower in Latin America and slower still in Asia. Life expectation and levels of education are lowest in Africa, better in Latin America, and better still in Asia.
Between 1950 and 2001, the Asian group increased per capita income fivefold and narrowed the relative gap between their incomes and the West. In other regions there was no convergence. Latin American income rose more than twofold, in the former command economies of Eastern Europe and the USSR less than twofold and in Africa about two thirds.
The divergence was even more striking in 1990-2001. In this period the Western group increased their income by a fifth, the Asian group by half, Latin America by a sixth, Africa stagnated and in the former communist countries per capita income fell by a quarter.
American policy since 1973 has been much more successful than that of Western Europe and Japan in realising potential for income growth. The incidence of unemployment is now about half of that in Western Europe, whereas in 1950–1973 it was usually double the European rate. Labour force participation increased, with employment expanding from 41% of the population in 1973 to 49% in 1998, compared with an average European rise from 42 to 44%. The percentage drop in working hours per person was half of that in Western Europe. These high levels of activity were achieved with a rate of inflation which was generally more modest than in Western Europe.
US policymakers have been less inhibited in operating at high levels of demand than their European counterparts. Having the world’s major reserve currency, and long used to freedom of international capital movements, they generally treated exchange rate fluctuations with benign neglect. The Reagan administration made major tax cuts, and carried out significant measures of deregulation in the expectation that they would provoke a positive supply response that would outweigh potential inflationary consequences. The US operated with more flexible labour markets. Its capital market was better equipped to supply venture funds to innovators. Its economy was as big as Western Europe but much more closely integrated. Demand buoyancy was sustained by a stock market boom in the 1990s.
The United States was a major gainer from the globalisation of international capital markets. In the postwar period until 1988, US foreign assets always exceeded liabilities, but thereafter its net foreign asset position moved from around zero to minus $1.5 trillion (more than 20% of GDP). Thus the rest of the world helped to sustain the long American boom and financed the large US payments deficit.
Future prospects
The table provides a quantification of growth performance of eight major regions of the world economy and some very tentative projections for development up to the year 2015.
The demographic projections are those of the United Nations Population Division, and indicate a continuing decline in the rate of population growth in virtually all parts of the world. Nevertheless there will still be a very striking difference between the advanced capitalist group and Africa. At 0.33% a year it would take 210 years to double population in the first group. In Africa it is likely to happen within 32 years.
In making per capita GDP projections, I assumed a continuance of 1990-2001 rates of performance in Western Europe and Japan and a mild slowdown in the USA, where the information technology bubble of the 1990s has burst, and where the capital inflow which financed its trade deficit seems likely to slacken substantially. Aggregate per capita growth in the “West” seems unlikely to slow down very significantly, but combined with the demographic slowdown, it means that aggregate GDP growth would be about 2% a year. This pace would be similar to that in 1913-1950. Growth momentum transmitted by the “West” is likely to be more modest than in 1870-1913 and 1973-2001.
…
Eastern Europe
In Eastern Europe, the economic system was similar to that in the USSR from 1948 to the end of the 1980s, and so was economic performance. In 1950-1973, per capita growth more or less kept pace with that of Western Europe, but faltered badly as the economic and political system began to crumble. From 1973-1990, it grew at 0.5% a year compared with 1.9% in Western Europe.
The transition from a command to a market economy was difficult in all of the countries. The easiest part was freeing prices and opening of trade with the West. This ended shortages and queuing, improved the quality of goods and services and increased consumer welfare. However, much of the old capital stock became junk; the labour force needed to acquire new skills and work habits; the legal and administrative systems and the tax/social benefit structure had to be transformed; the distributive and banking networks to be rebuilt from scratch. The travails of transition led to a fall in average per capita income for the group from 1990 to 1993, but it rose by over 3% a year from then to 2001. My projection assumes that this pace of advance can be maintained at least until 2015. In fact, these countries can probably do better than this if they can be integrated into the European Union with better access to its goods, labour, and capital markets, its regional and other subsidies, than they have thus far enjoyed. Present real income levels are only a third of those in Western Europe. Wages are also much lower, but the disparity in skills is much less. The Eastern economies are therefore capable of mounting a catch-up dynamic similar to that of Asia if the integration takes place.
For rough comparisons, it is now useful to divide the world in two and compare developments in the advanced capitalist group with the aggregate for lower-income countries – designated as the “West” and the “Rest” in our tables. On average, the West increased its income per head fourfold from 1950 to 2001 – a growth rate of 2.8% a year. In the rest of the world there was a threefold increase – a growth rate of 2.2%. In both cases this was much better than earlier performance. From 1820 to 1950, income grew 1.3% a year in the West and 0.6% in the Rest. Though the gap in income level was still increasing, the acceleration in performance was bigger in the Rest.
Population of the West rose by half from 1950 to 2001 (0.8% a year), about the same pace as in 1820-1950. In the Rest, the situation was very different. Population grew by 2.0%, compared with 0.6% in the earlier period. This reflected a major improvement in welfare as mortality declined and life expectation rose from 44 to 65 years in 2001 – much faster than in the West. In the past two decades birth rates have fallen rapidly – a demographic transition which happened earlier in the West.
The West is now a relatively homogeneous group in terms of living standards, growth performance, economic institutions and modes of governance. Over the past five decades there has also been significant convergence in most of these respects. This is not true of the Rest. There are more than 180 countries in this group. They have nearly all increased their income levels significantly since 1950, but the degree of success has varied enormously. Most of Asia is experiencing fast per capita income growth. Most African countries are fairly stagnant. Most Latin American countries found it very difficult to keep a steady trajectory of advance in the 1980s and 1990s. Population growth is fastest in Africa, a good deal slower in Latin America and slower still in Asia. Life expectation and levels of education are lowest in Africa, better in Latin America, and better still in Asia.
Between 1950 and 2001, the Asian group increased per capita income fivefold and narrowed the relative gap between their incomes and the West. In other regions there was no convergence. Latin American income rose more than twofold, in the former command economies of Eastern Europe and the USSR less than twofold and in Africa about two thirds.
The divergence was even more striking in 1990-2001. In this period the Western group increased their income by a fifth, the Asian group by half, Latin America by a sixth, Africa stagnated and in the former communist countries per capita income fell by a quarter.
American policy since 1973 has been much more successful than that of Western Europe and Japan in realising potential for income growth. The incidence of unemployment is now about half of that in Western Europe, whereas in 1950–1973 it was usually double the European rate. Labour force participation increased, with employment expanding from 41% of the population in 1973 to 49% in 1998, compared with an average European rise from 42 to 44%. The percentage drop in working hours per person was half of that in Western Europe. These high levels of activity were achieved with a rate of inflation which was generally more modest than in Western Europe.
US policymakers have been less inhibited in operating at high levels of demand than their European counterparts. Having the world’s major reserve currency, and long used to freedom of international capital movements, they generally treated exchange rate fluctuations with benign neglect. The Reagan administration made major tax cuts, and carried out significant measures of deregulation in the expectation that they would provoke a positive supply response that would outweigh potential inflationary consequences. The US operated with more flexible labour markets. Its capital market was better equipped to supply venture funds to innovators. Its economy was as big as Western Europe but much more closely integrated. Demand buoyancy was sustained by a stock market boom in the 1990s.
The United States was a major gainer from the globalisation of international capital markets. In the postwar period until 1988, US foreign assets always exceeded liabilities, but thereafter its net foreign asset position moved from around zero to minus $1.5 trillion (more than 20% of GDP). Thus the rest of the world helped to sustain the long American boom and financed the large US payments deficit.
Future prospects
The table provides a quantification of growth performance of eight major regions of the world economy and some very tentative projections for development up to the year 2015.
The demographic projections are those of the United Nations Population Division, and indicate a continuing decline in the rate of population growth in virtually all parts of the world. Nevertheless there will still be a very striking difference between the advanced capitalist group and Africa. At 0.33% a year it would take 210 years to double population in the first group. In Africa it is likely to happen within 32 years.
In making per capita GDP projections, I assumed a continuance of 1990-2001 rates of performance in Western Europe and Japan and a mild slowdown in the USA, where the information technology bubble of the 1990s has burst, and where the capital inflow which financed its trade deficit seems likely to slacken substantially. Aggregate per capita growth in the “West” seems unlikely to slow down very significantly, but combined with the demographic slowdown, it means that aggregate GDP growth would be about 2% a year. This pace would be similar to that in 1913-1950. Growth momentum transmitted by the “West” is likely to be more modest than in 1870-1913 and 1973-2001.
…
Eastern Europe
In Eastern Europe, the economic system was similar to that in the USSR from 1948 to the end of the 1980s, and so was economic performance. In 1950-1973, per capita growth more or less kept pace with that of Western Europe, but faltered badly as the economic and political system began to crumble. From 1973-1990, it grew at 0.5% a year compared with 1.9% in Western Europe.
The transition from a command to a market economy was difficult in all of the countries. The easiest part was freeing prices and opening of trade with the West. This ended shortages and queuing, improved the quality of goods and services and increased consumer welfare. However, much of the old capital stock became junk; the labour force needed to acquire new skills and work habits; the legal and administrative systems and the tax/social benefit structure had to be transformed; the distributive and banking networks to be rebuilt from scratch. The travails of transition led to a fall in average per capita income for the group from 1990 to 1993, but it rose by over 3% a year from then to 2001. My projection assumes that this pace of advance can be maintained at least until 2015. In fact, these countries can probably do better than this if they can be integrated into the European Union with better access to its goods, labour, and capital markets, its regional and other subsidies, than they have thus far enjoyed. Present real income levels are only a third of those in Western Europe. Wages are also much lower, but the disparity in skills is much less. The Eastern economies are therefore capable of mounting a catch-up dynamic similar to that of Asia if the integration takes place.
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