Kemal Dervis
Kemal Dervis

The global economy has been especially strong in recent years. World-wide per capita income is growing as rapidly as ever before. Incorporating recently available projections for 2007, global gross domestic product (GDP) per capita has increased in the last five years (2003-2007) at an annual average rate of 2.3 percent. This compares with 1.2 per cent from 1990 to 2002 and with 1.4 percent from 1981 to 1989. Sustained global growth rates of this magnitude are unprecedented since the immediate post-WWII era and part of the 1960s.

Developing countries are now playing a major role as drivers of global growth. High income countries were responsible for 85 percent of the global cumulative growth in GDP from 1960 to 1973, 78 percent from 1973 to 2001, but only 63 percent from 2001 to 2005. If GDP is measured at purchasing power parities (PPPs) developing countries are now by far the largest contributors to global growth. Also reflecting the increasing weight of developing countries, when global GDP is measured at PPPs global per capita growth registers about 3 percent a year since the beginning of this century. And since the developing economies that are expanding rapidly are very large, such as China and India, if we weight per capita GDP growth by population, global growth has been even more impressive, it goes up to values above 4.5 percent a year, with GDP in PPP.

Divergence amidst Convergence by Some Developing Countries

Developing countries are propelling global growth and capturing, as whole, increasing shares of global income. But how widely shared across developing countries have been the benefits from global economic growth?

One group of developing countries, representing a huge share of world population, has been at the forefront of global growth. Their economies are growing faster than those of developed countries. They are also starting to catch up with the wealthiest nations in terms of human development. Millions of their citizens are being lifted out of poverty every year, with life expectancy, child mortality and literacy converging on first-world levels. These countries are accessing global markets for goods, capital, and technology; they are trading more and more with each other as well as with rich countries. The share of global trade captured by developing countries, primarily due to these well performing developing countries, is now 37 percent, compared with 29 percent in 1996.

However, another group of developing countries – greater in number, if smaller in population – is being left behind. These countries are today farther away economically from the richest countries than ever before. Cross-country inequalities in mean income, which have grown relentlessly over the last two hundred years, continue to widen. The ratio of PPP GDP per capita in the 10 richest countries to PPP GDP per capita in the 10 poorest increased from about 21 in 1960 to 34 in 1990, and increased further to 47 in 2001 and to 50 in 2005. With GDP expressed in market exchange rates, the ratios are much higher. Some countries have also seen a sharp drop in life expectancy, in most (but not all) cases as a result of HIV/AIDS.

Drivers of Further Divergence: Recognizing the role of Climate Change

Will the forces of convergence eventually attract those developing countries being left behind? Part of the answer depends on how the world community will respond to the challenge of climate change. Climate change is traditionally thought about as an environmental sustainability problem. Is growth now taking place at the expense of the opportunities for future generations? This concern is at the heart of the definition of sustainable development: development today that does not preclude the development of future generations.

But besides this intergenerational income distribution concerns, there is a growing realization of the different impact that climate change will have on different regions and countries. And the evidence is clear in suggesting that developing countries will be hit the hardest and soonest, both because of geography and because of low income making adaptation much more difficult. Climate change is, in fact, already affecting growth and development prospects in some developing countries. Climate change, if not addressed, will impart an “unequalizing” impulse to global development. Many countries that are already having difficulties sharing in the fruits of global growth will face substantial new costs and barriers to increased prosperity. Some communities would most likely face declining living standards and human development indicators.

Inequality is Going up within Many Developed and Developing Countries

Patterns of inequality within countries are another critical dimension to understand how income distribution is talking place. Patterns of strong divergence across citizens of the same country are emerging. Income inequality is not growing in all countries. But it is going up in many countries, both developed and developing. Most notably, it is increasing in several of the large and rapidly expanding developing countries, suggesting that many are being left behind from sharing in the benefits of rapid growth.

While the patterns of income distribution within countries are varied across countries, one notable feature common to both developed and developing where inequality is going up is the accumulation of income at the very top – the top 1 percent or even 0.1 percent – of the income distribution. It is too early to tell whether the extraordinary growth in the share of income going to the top of the income distribution is unique to a few countries or whether it signals a more general trend. The drivers of the distribution of income are complex and can differ significantly from country to country. But the growing importance of income (in some cases mostly in the form of salaries) at the top of the income distribution is consistent with super-star and winner-take-all phenomena, with skyrocketing pay for executives, movie and sports stars, and financiers.

Within Country Inequality matters for Growth…

Does inequality matter? There is some evidence showing that it does, with indicators of self-reported well-being and life satisfaction being inversely correlated with increasing inequality. This unease with the evolution of income distribution, in turn, is correlated with the deepening of market integration and openness that is propelling global growth. While correlation is not causation, it is certainly affect perceptions. It is possible, therefore, that the processes of market integration and openness that have been critical to accelerate world economic growth can continue to gather political and popular support in both developed and developing countries.

What about the effects of inequality on growth and economic performance? In principle, some level of inequality may benefit growth, both through incentives that reward talent and hard work, as well as the accumulation of income that stimulates investment. On the other hand, it is conceivable that high inequality may alienate people from productive economic activity if it is linked to discrimination or perpetuation of privileges. This is, therefore, essentially an empirical question. The evidence seems to suggest two things. First, it suggests that very high levels of inequality are detrimental to growth, because they discourage the establishment of political and economic institutions that are conducive to growth and investment, and they fester alienation that increases the threats to political and social stability. Second, empirical work indicates that the interaction of inequality with underdeveloped markets and weak institutions – which happens in many developing countries – can also hinder growth.

…and it matters for Development

Increasing inequality and its effect on dampening growth has as one of its consequences a reduction of the growth elasticity of poverty reduction, that is, the rate at which growth translates into poverty reduction. In general, countries with higher levels of inequality have to grow much more rapidly, or take much longer, to achieve the same degree of poverty reduction that countries with lower levels of inequality. There has evidence of a dramatic fall in pro-poor growth: since 1990 it takes roughly three times as much growth to achieve the same rate of poverty reduction observed before 1990 in a typical lower middle-income country.

Growth that is not inclusive is also generating less employment recently than it has in the past. While in some developed countries this is a reflection of productivity gains (increase in output can be driven by either, or a combination of, increases in labor utilization or increases in the amount that is produced by each worker) in many developing countries this is reflected in less opportunities for decent employment. This is particularly troubling when it comes to youth employment, which has much higher unemployment rates that total population, with even lower employment elasticities.

The Imperative of Addressing the Drivers of Divergence

The world economy has been growing rapidly. While many developing countries have been benefiting from this expansion in global income, other countries are being left behind. The challenge of climate change will add to the forces that are driving income divergence. It will have to be brought into the debate not only as an environmental or intergenerational issue, but as a core development issue. Within countries, even in those that are growing rapidly, income expansion is not being shared by all. These cross-country and within-country divergence trends may impose economic and political limits on long term growth and on the further integration of the global economy. It is highly questionable whether the processes of globalization and market integration that, along with new technologies, have been the sources of accelerated world economic growth, can continue without concerted effort to deal with divergence and inequality.

Photo © UNDP

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