Wednesday, October 25, 2006

The rising wealth of nations

Robert Schiller, a Professor at Yale University, is one of the most creative macroeconomists around today. Lately he has been pretty gloomy about the short run prospects for the U.S. economy in part because of the unwinding of “irrational exuberance” in the housing market. While waiting for the Fed announcement today, I came across this interesting piece that was written by Schiller and was published in the Japan Times. I was surprised that Shiller has an optimistic outlook for worldwide GDP growth in coming decades:

The rising wealth of nations


NEW HAVEN, Connecticut -- The new Penn World Table, Version 6.2, comparing standards of living across countries, has just been released. The latest figures are for 2004, and, because of data lags, not all countries are included. Yet these numbers are valuable because they are of exceptional quality and they correct systematically for relative price differences across countries, which sometimes leads to surprising results.

Among the 82 countries for which 2004 data are now available, there is good news: Real per capita gross domestic product rose by an average of 18.9 percent between 2000 and 2004, or 4.4 percent per year. People generally were a lot better off than they were just a few years earlier. At that rate, real per capita GDP will double every 16 years.

Many people who could not afford a car in 2000 had one in 2004, and people who could afford only one car in 2000 had two. People who could not afford to send their children to a good school or college could. And so it was with many different goods and services that people consume.

One surprise is that there was relatively little change in the ranking of countries by real per capita GDP after 2000. Despite all the talk about the Chinese economic miracle, China's ranking rose only slightly, from 61st (out of 82 countries in 2000) to 60th in 2004 -- even though per capita real GDP grew by 44 percent between 2000 and 2004, or 9.6 percent a year, the highest of the major countries.

The reason China did not rise higher is that other countries were growing too, and because the gaps between countries were enormous. The range between the poorest and the richest countries in the world is a factor of more than 100. The average real per capita GDP of the top 25 percent of countries is 15 times that of the bottom 25 percent.

Watching these countries progress is like watching a marathon. At first, one is impressed by most of the runners, almost all of whom seem to be going fast. As they pass by, all spread out, one sees that some runners seem to be gaining rapidly. And yet they do not often overtake one another, because the distances between them are so large. Indeed, other runners are out of sight, perhaps miles ahead.

China isn't the only success story. Other big winners in terms of real per capita GDP between 2000 and 2004 were Lithuania (up 48 percent), Romania (up 41 percent), Estonia (up 40 percent), Chile (up 33 percent), Hungary (up 32 percent), Greece (up 31 percent), New Zealand (up 28 percent), Australia (up 25 percent), South Korea (up 23 percent), Ireland (up 23 percent), South Africa (up 23 percent), and Nigeria (up 22 percent).

Some of the worst performers among the major countries were Israel (a beleaguered country, with real per capita GDP up only 2 percent between 2000 and 2004) and Argentina (hit by a terrible financial crisis in 2001-2002, up only 9 percent between 2000 and 2004).

Economic performance in several Latin American countries was relatively weak in this period, with Uruguay's real GDP per capita actually recording a fall by a fraction of a percent. But the overall picture was amazingly good. If such growth rates continue, we will see relatively poor countries like India, Indonesia, the Philippines or Nicaragua reach the average levels currently enjoyed by advanced countries in 50 years. But, of course, they will not have caught up with these countries, for those countries will have moved ahead too.

It is hard to imagine now what that world will be like with a doubling or quadrupling of just about every country's GDP. What will all these countries do with all that money?

In 1958, the economist John Kenneth Galbraith wrote the best-selling book "The Affluent Society," in which he argued that the advanced world as typified by the United States had by that year finally emerged from "grim scarcity," when dire necessity dictated our lives, to a "world of affluence."

He wrote: "So great has been the change [in standards of living] that many of the desires of the individual are no longer even evident to him. They become so only as they are synthesized, elaborated and nurtured by advertising and salesmanship, and these, in turn, have become among our most important and talented professions."

Real per capita GDP in the United States is now three times higher than it was in 1958. What have people been spending all that extra money on? Is it all dictated by advertisers and salesmen who are inventing needs?

According to my calculations comparing 1958 and 2005 data from the U.S. Department of Commerce, Americans spent 27 percent of the huge increase in income between 1958 and 2005 on medical care, 23 percent on their homes, 12 percent on transportation, 10 percent on recreation, and 9 percent on personal business activities.

The kinds of things that advertisers and salesmen typically promote were relatively unimportant. Food got only 8 percent of the extra money, clothing only 3 percent, and personal care 1 percent.

Unfortunately, idealistic activities also received little of the extra money: 3 percent for welfare and religious activities, and a similar share for education. Thus most of the extra money was spent on health, a nice home, travel and relaxation, and doing a little business.

Maybe that is the way it will be around the world. As long as we can keep worldwide growth going at its current rate, billions of people can look forward to the same kind of improvement. And that should be truly inspirational.”

Robert J. Shiller is professor of economics at Yale University, chief economist at MacroMarkets LLC, which he cofounded (see, and author of "Irrational Exuberance and the New Financial Order: Risk in the 21st Century." Copyright Project Syndicate 2006 ( )

Read Chapters 6 and 8 in your text for more information on economic growth.

Extra Credit: What major country had the fastest growth in its standard of living between 2000-2005? If you are the first student to send me an e-mail ( with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.

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