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Global Balance Sheet — 1913 to 1998

Are most people better off economically now than at the beginning of the 20th century?

June 27, 2003

Are most people better off economically now than at the beginning of the 20th century?

In his magisterial work: "The World Economy — A Millennial Perspective", Angus Maddison delves into historical national statistics with the care and persistence of a medieval monk.

His painstaking efforts are a true treasure trove for anybody interested in understanding how living standards have developed over long periods of time.

Pulling together some of the detailed numbers laid out in Maddison's book, one can show in some fascinating snapshots how the balance of economic welfare and power around the world has shifted during the last century.

To accomplish this challenging task, Maddison zeroes in on three significant periods of time — and allows one to make intriguing comparisons.

The first time period is 1913, which is the representative point of the end of the liberal 19th century order.
The second yardstick is 1950, a time of incipient economic recovery after a long haul of 30 years of alternating military conflict and economic depression.

The last time point, 1998, represents both the end of the century — and a time of widespread liberalization that brought the global economic policy environment back close to what it had been in 1913.

As a general rule, over the last 100 years people of all regions of the world on average improved their standard of living. The average income of Americans and Europeans quadrupled, that of Sub-Saharan Africans doubled, and the Japanese improved their standard of living more than any other nation in the world.

But what about changes in the comparative economic shares — or "planetary GDP" — of the United States and Western Europe, Japan and the rest of the world? That measure is a good indication of each region's relative "economic weight" and of economic changes over the 20th century.

Contrary to widely held perceptions of some critics of globalization, the world share of the "Western powers’" GDP declined from 53% to 43%. After 1950, Japan increased its share of world GDP from 3% to 8%. The rest of the world — which includes developing countries — increased its share of world GDP from 45% to 50%.

Surprisingly, the economic weight of the United States did not change appreciably during the 20th century. After increasing from 19% in 1913 to 27.3% in 1950 — the U.S. economic weight actually fell to 22% by the end of the century. Western Europe's share of global GDP declined dramatically — from 34% in 1913 to 20% in 1998, largely as a reflection of slow population growth.

Unsurprisingly, "other Asian countries" (including Korea) increased their share of world output — as did China, but only slightly.

Latin America increased its share by only 4%, reflecting rapid population growth. Between 1913 and 1950, the share of the former Soviet Union and Eastern Europe remained at 13% — but fell to just 5% by 1998.

Now let's shift the focus from nation's economic weight to their population's standards of living. For this purpose, we consider income levels relative to those in the United States — rather than the absolute dollar levels used for the GDP comparisons.

Perhaps most striking is the rise of Japan from 20% of the United States income in 1950 to 75% by 1998. This spectacular improvement demonstrates that it is possible for a poor country to grow a lot.

The position of Western Europe vis-à-vis the United States in 1913 was about 70% of the U.S. level. By the end of the 20th century it was at exactly the same level.

Meanwhile, the former Soviet Union failed to regain its place (relative to the United States) which they occupied as far back as in 1913. Africa and India income also declined by 9% and 7%, respectively, relative to the United States over the 20th century.

As to the developing nations, perhaps the most interesting comparison concerns China.

Sure, the newspapers are full of reports about China's growth miracle. But even year after year of outstandingly rapid growth since the end of Mao's era merely brought China's per capita GDP back to roughly where it was before World War I — at around the 10% level compared to the United States.

True, since 1998 China has combined to advance further and improved is position vis-à-vis the United States. Still, the economic story of China was largely one of economic destruction and recovery.

The bottom line? In absolute terms, over the past century, the world economy has changed in spectacular ways. Most people are enormously better off than their great-grand parents were in 1913.

In particular, the number of destitute people declined during the last quarter century — the first such decline in recorded economic history. Yet in relative terms, Maddison's numbers suggests that change was more limited in many countries.

How can this seeming contradiction be explained? Economists can come to the rescue. Stephen L. Parente and Edward C. Prescott in their book "Barriers to Riches" argue that differences in living standards have little to do with natural resources — or levels of investment.

Rather, they see these differences in the intensity that various countries make of the world's existing stock of know-how.

Countries that are open to the flow of ideas — and whose laws, customs and institutions encourage wealth creation — can catch up with the old-established "industrial" economies. Japan and Korea are outstanding examples of catch-up.

Most countries of the world, regrettably, have over the decades erected "barriers to riches" by keeping their citizens from taking full advantage of the stock of existing world knowledge. Ultimately, these barriers are self-destructive. They shield vested interests against more efficient competitors.

Intriguingly, this also helps explain why Europe and Japan's per capita GDP does not exceed that of the United States. Hard as it is, catching-up is easier to do than continuing to accelerate economic growth once a country has reached the frontiers of knowledge.

This is likely also why the successful OECD economies — the club of the world's rich countries — have such similar levels of affluence.