Globalist Analysis

Ending the Rich-World Bias in Global Economic Statistics

The current economic crisis is called the “global financial crisis.” But is the term “global” justified?

Credit: Norman Chan/Shutterstock.com

Takeaways


  • The "people's" growth rate gives a more accurate idea as to how economic growth (or lack of it) affects individuals across the world.
  • The "plutocratic" growth rate that we normally calculate and use gives an exact metric regarding what happens to overall economic output.
  • In the "people's" calculation, it is not the richest countries that matter the most, but the most populous.

Just consider how the four years since the onset of the “global crisis” look in the eyes of the non-Western world:

– In sub-Saharan Africa, the average per capita real growth rate was 1.5% a year.

– In Latin America, it was nearly that high, and in Asia, it was 3%.

These growth rates are respectable, even impressive, by historical standards. Yes, in Europe, North America and Russia, growth sputtered — and in many countries (but not in all years), rates of GDP growth turned negative. Global output declined by 2% in 2009, but it rebounded by 2.7% in 2010, and is estimated to have risen by least as much in 2011. Do these seem like “global” crisis numbers?

The rebound of global output was dampened in the last two years because the crisis affected the richest part of the world. The richest part, by definition, produces more goods and services than the other parts. If its output goes down or stagnates, it tends to drag world GDP down with it.

The global economic statistics we use show a tremendous Western, or rich world, bias. There is an implicit weighting scheme in the calculation that is seldom recognized. It is called “plutocratic” weighting, and it gives a greater weight in the overall calculation to richer countries.

A simple example illustrates how: Imagine two countries, A and B, that have the same population, but A is twice as rich as B. Let’s assume country A’s output drops by 10% and B’s output increases by 10%. The overall (“plutocratic”) growth rate would be negative 3.3%. This is the extent by which the total volume of goods and services has gone down.

But let’s now look at this example from the point of view of individuals who live in the two countries. Suppose for simplicity’s sake that everybody in country A (and also everybody in country B) is equally affected by her country’s performance. That is, all people in A experiences a real income decline of 10%, while everybody in B experiences a real income increase of 10%.

When we aggregate across individuals (and their presumed feelings of betterment or deterioration of well-being), it turns out that as many people register an increase as a decline, and that, in percentage terms, both the increase and the decline were the same. Thus, a “people’s” (population-weighed) average rate of growth is zero. Positive 10% exactly offset the negative 10%.

While the “plutocratic” growth rate that we normally calculate and use gives an exact metric regarding what happens to overall economic output, the “people’s” growth rate gives a more accurate idea as to how economic growth (or lack of it) affects individuals across the world.

In the “people’s” growth rate, every individual in the world counts the same. In the “plutocratic” growth rate, what happens to the income of rich people matters exactly so much more as their incomes exceed the incomes of the poor.

In the “people’s” calculation, then, it is not the richest countries that matter the most, but the most populous. And it is precisely these populous countries that have continued to chalk up positive, and often very high, rates of growth in the midst of what is called “the worst crisis since the Great Depression.”

Between 2007 and 2011, China’s GDP per capita expanded by 43%, India’s by 30%, Brazil’s by 14%, and Indonesia’s by 7%. These four countries are home to almost three billion people, or about 43% of the world population. Thus, it is not surprising that for the world as a whole, the average “people’s” growth rate during the 2007-11 “crisis” was about 4% per capita, just slightly above the 1990-2000 long-run average.

A lack of (media) focus

The reason why the Western media portray the crisis as a “global” crisis (and why, when non-crisis countries are mentioned at all, it is merely in their “supporting actor” role of making sure their demand does not slow down and make the recession in the West worse) is the same reason we (almost) never hear about the wars in Congo. People in the Western world, who are still much richer than others, are mostly interested in their own fortunes, and the fortunes of people similar to them, when they create and buy the news.

The same media paid scant attention when Russian GDP, nosedived from a level that is a fraction of American or West European in the 1990s. A meaningless phrase, “transition recession,” was created and used as if it were an explanation. The Asian crisis of 1998 attracted far more attention, chiefly because of the threat of contagion spreading to developed market economies. But that threat never materialized, and the attention waned.

Two decades of unremitting African misery and descent into hell passed largely unnoticed by the mainstream media. Who would know, for example, that nine African countries, with about 150 million people, have lower per capita incomes today than in 1980 — and seven lower than in 1960? But the tiniest of movements in the bond market or on Wall Street is followed as if it were a direct pronouncement by the Almighty.

What we have to contend with is an obvious global imbalance. To a neutral “sympathetic observer,” as Adam Smith ingeniously called him, a real income decline of 1% experienced by an African country should attract as much attention as 1% decline experienced by a similar-sized Western nation.

Or perhaps am I wrong? Should we, from a “neutral” point of view, care more when Bill Gates loses 1% of his income than when an unemployed person has his benefits cut in half? If you were to look at the oceans of ink, the terabytes of blog posts, and the hours and hours of cable news coverage dedicated to the “global” crisis, you would think so.

Rather than focusing only on total economic output as we do now, we ought to refocus the calculation on how individuals’ incomes across the world are affected. Thus, instead of giving to each individual the implicit weight equal to his income, we should give the same implicit weight to everybody. Such a statistical rebalancing would lead to a world where we move from caring about quantities to caring about people.

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About Branko Milanovic

Branko Milanovic is the lead economist in the World Bank's Development Research Group and a visiting professor at the University of Maryland.

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