Why some countries prosper and others don’t is one of the most contentious debates that concerns economists, political scientists and policy makers. After W.W. II and during the Cold War wealthy countries embraced the notion that good institutions (rule of law, education, free markets) teamed up with technology and savings would allow poor countries (called “latecomers”) to catch up. These theories were famously promoted by economists like Walt Rostow and pursued through foreign aid and institutions like the World Bank. The results 50 years later are surprising. With a few exceptions — East Asia, Singapore and, more recently, China and Eastern Europe — there has been very little catching up by the poor. Most gains have been achieved by the already relatively prosperous; for example, the country that has had the largest relative increase in per capita income has been Norway.
The data from the World Bank measuring per capita income relative to the United States, though not comprehensive, is revealing: “catching up” is a reality for the few; most stagnate; and many actually lose ground.
Measuring GDP/capita of countries as a percentage of the GDP per capital of the United States for the past 50 years, what we discover from the data (which covers 78 countries over this time-frame) is that the greatest gains were achieved by countries that had already secured relatively high income levels 50 years ago. In the chart below, which shows the countries that increased their ratio by more than 10%, we see Norway as the top gainer, increasing by 90 percentage points from 56.5% of the GDP/capita of the U.S. to 145.5% (145.5-56.5=90). Singapore, Hong Kong, Korea and are the non-European highlights; all of these started from low levels of GDP/capita, particularly China and Korea. Korea, which now has reached the level of Spain, in 1967 had income per capita which was only 3% of the U.S. level, half of Brazil’s level and in line with the poorest African countries. Uruguay, Trinidad and Tobago and Malaysia also appear with more moderate gains, just above 10%. (Note: the data is in current dollars, so currency movements impact the data)
The Biggest Gainers, 50 years
The vast majority of countries of interest to emerging market investors made very moderate gains over this period, in essence proving unable to make progress in bridging the gap with the U.S. The chart below shows those countries that have achieved between zero and ten percent gains in relative GDP/capita compared to the U.S. over the 50-year period. This includes the middle-income countries of Latin America, Turkey and Thailand, examples of economies that have fallen into the “middle income trap.” India, the Philippines and Nigeria are examples of lower income countries that have also made very little progress in bridging the income gap, despite enormous potential for productivity improvements.
The Stagnant Countries, 50 years
Perplexingly, it is the poorer countries that make the least progress, including many very low-income countries of Africa. But this list of serious under-achievers also includes South Africa, Argentina, Zimbabwe and Venezuela, countries that are moving from middle-income status downwards.
The Losing Countries, 50 years
Taking a look over shorter periods, we can see some interesting trends developing. 30 Years coincides with the beginning of modernization reforms in China (1980) and in India (1991), the fall of the Berlin Wall (1989) and accelerated European integration. The chart below shows the past 30 years, including 123 countries. Of note is the rise of Ireland (“the Celtic Tiger”), New Zealand , Australia and Israel, and the generalized strength of a European region benefitting from economic integration which drive improvements in incomes in Spain, Portugal and Turkey. The absence of emerging market countries, except for the Asian Tigers and China, is striking, though the good performance of Uruguay (the “Switzerland of Latin America”) and reform-minded Chile are significant exceptions.
The Winners over the past 30 years
Looking at the past 15 years, we see very interesting new trends. The World Bank has new increased their data set to 164 countries over this period, adding Russia and its former Iron Curtain comrades, among others. The chart below shows these very interesting developments, with, for the first time, as slew of emerging markets appearing. Of the 27 names on the chart, ten, including China, are former communist, centrally-planned economies, that have undergone profound economic reforms.
The Winners over the past 15 years
Fed Watch:
- Global risk-free rate hits 88-year low (Bank of England)
- Why rates won’t rise (Seeking Alpha)
India Watch:
- India government to promote electric vehicles (Economic Times)
China Watch:
- The coming China trade war (IRA)
- China’s investors eye Brazil (FT)
- When China leads (Project Syndicate)
China Technology Watch:
- Chinese Surveillance camera’s are found on U.S. army bases (WSj)
- Hisense buys Toshiba’s TV business (Caixing)
- VW to invest $12 billion in EV in China ( WSJ)
- Google tries to enter China again with AI Bloomberg)
EM Investor Watch:
- Brazil’s stagnation (FT)
- Tech leapfrogging in Africa (The Economist)
Technology Watch:
- The road to cheap ubiquitous energy (The Economist)
- The power plant of the future is your home (WEF)
- The Future of the car, Bob Lutz (Auto News)
Commodity Watch:
- There is more farmland then previously thought (Bloomberg)
- Australia’s economy is a house of cards (Linkedin)
Investor Watch: