Advances in Development Reverse Global Inequality Trends

Fig. 13. Cross-sectional relationship between TFR and HDI in 1975 and 2005

Source: Myrskyla, Kohler, and Billari 2009: 741.

That is, in 1975 we observed a linear relationship between HDI and a respective variable for the whole HDI range, and now we discover that for 2005 there is, in fact, a curvilinear relationship whereby the old correlation persists among countries with low and low-middle HDI but not among countries with high-middle and high HDIs, which display a correlation directly opposite to the old one. There is, of course, a strikingly apparent reason for the recent finding of a curvilinear relationship between HDI and TFR as the ‘old’ (negative) relationship exists in the HDI range 0.3–0.9,² while the ‘new’ (positive) relationship is found in a totally new range (one which no countries had reached in 1975). On the other hand, as regards the HDI – economic growth relationship, we find the ‘old’ (positive) relationship in HDI 0.15–0.6 ranges in both cases; however, with respect to the range beyond 0.6 Fig. 14 suggests that it is strongly negative for 2005–2010 and strongly positive for the 1980s.

Fig. 14. Comparing HDI values and annual per capita growth rates for the 1980s and 2005–2010, a scatterplot with fitted LOWESS lines

However, a closer inspection of the dataset reflected in Fig. 14 indicates that the negative correlation between HDI levels and economic growth rates among the countries with the top HDI scores (over 0.7) can be also detected for the 1980s³ (see Fig. 15).

Fig. 15. Correlation between Human Development Index and Average Growth Rate in the > 0.70 range for the 1980s and HDI

Note: r = –.422, p = .04 (omitting an outlier [Argentine] that experienced a severe crisis in the 1980s due to some idiosyncratic causes).

Data sources: Klugman 2011; World Bank 2013.

However, the difference between the two cases still remains. In the case of the relationships between the HDI and TFR, the emergence of a correlation in a new direction is accounted for by the emergence of a considerable number of countries with HDI values > 0.9 by 2005. In the case of the relationship between the HDI and economic growth rates, the emergence of a salient negative correlation among the high-HDI countries is connected both with the growth of the number of countries with HDI scores⁴ higher than 0.7 and with the expansion of the negative correlation zone to the 0.6– 0.7 range. As a result, with regards to the HDI – TFR relationship, in 2005, the general (world-wide) negative correlation became substantially weaker than it was in 1975 but it still remained negative. With respect to the second case the overall positive correlation of 1980–1990 turns into an overall negative correlation by 2005–2010.

* * *

It might not be quite clear, but the change of the correlation between the HDI values and economic growth rates is actually good news as the positive correlation implies the growth of inequality between countries with regards to their human development levels (i.e., reflecting Ranis et al.'s vicious cycle) while the negative correlation implies a process of reducing inequality in HDI between countries.

The previous research surveyed earlier demonstrates that economic growth has a strong positive effect on the HDI. This implies that in countries with higher HDIs, HDI will grow at a faster rate than in countries with lower HDI which will lead to increasing the gap in human development between highly developed and less developed countries, that would lead in turn to growing divergence in the rates of economic growth, and so on. Of course, the perfectly positive relationship between HDI and economic growth rate would imply actual increasing returns and a positive feedback between those variables (‘virtuous cycle’). In fact, though such notions as ‘increasing returns’ and ‘positive feedback’ (‘virtuous cycle’) look intuitively very attractive, with respect to global development the respective phenomena actually imply just the growth of global inequality in human development, in general, and in per capita incomes, in particular. This was already noticed by Paul M. Romer (1985) who wrote that the model of increasing returns offered ‘an alternative view of long-run prospects for growth’ that was contrary to the assumptions of convergence theory: ‘per capita output can grow without bound, possibly at a rate that is monotonically increasing over time. The rate of investment and the rate of return on capital may increase rather than decrease with increases in the capital stock. The level of per capita output in different countries need not converge; growth may be persistently slower in less developed countries and may even fail to take place at all’ (Romer 1985: 1003). Thus a consistently positive feedback loop of increasing return would imply divergence rather than convergence of countries with different incomes – and growing rather than diminishing global inequality. Note that this was just the case in the 1980s when Romer's article was written.

On the other hand, the negative correlation we found implies that countries with lower HDIs tend to have higher economic growth rates than high-HDI countries and (due to the remaining strong positive correlation between per capita incomes and HDI) their HDI would tend to grow faster than the high-HDI countries – hence, the level of HDI inequality should tend to decrease over time. Indeed, as we see in Fig. 16, the global HDI inequality levels (calculated as the value of standard deviation from the mean) have tended to increase when the correlation in question was positive (that is, in 1980–2000) and tended to decrease when this correlation became negative (see Fig. 16).

Fig. 16. World Human Development Inequality Index, 1980–2010

Data source: calculated on the basis of data published in Klugman 2011.

Above we presented a theoretical framework for explaining the grounds for expecting a positive correlation between HDI scores and economic growth rates; indeed we have argued that this has been a running theme of most articles that relate HDI and economic growth. So why then do we recently observe negative correlations? What theory may account for the recent negative correlation (between 2005–2010 especially) that we have demonstrated in this paper.

This new trend that we have described thus far can in part be accounted for by the phenomenon of convergence. The cornerstone for the theory of convergence was laid in an essay Economic Backwardness in Historical Perspective by Alexander Gerschenkron (1952), who developed the ‘theory of relative backwardness’ relying on data obtained from the history of European countries. The main tenet of his theory is as follows: ‘the opportunities inherent in industrialization may be said to vary directly with the backwardness of the country’ (Gerschenkron 1952: 6). Remarkably, Gerschenkron emphasized that the conditions inevitably required for a country to take advantage of its backwardness included ‘adequate endowments of usable resources’ and the absence of ‘great blocks to industrialization’ (Ibid.: 6). Thus, backward countries (provided that the outlined conditions are observed) were bound to grow faster than countries with developed economies, the former thus gradually converging with the latter. As Samuelson and Nordhaus put it,

poorer countries have important advantages that the first pioneers along the path of industrialization did not. Developing nations can now draw upon the capital, skills, and technology of more advanced countries Gerschenkron suggests that relative backwardness itself may aid development. Countries can buy modern textile machinery, efficient pumps, miracle seeds, chemical fertilizers, and medical supplies. Because they can lean on the technologies of advanced countries, today's developing countries can grow more rapidly… As low-income countries draw upon the more productive technologies of the leaders, we would expect to see convergence of countries toward the technological frontier. Convergence occurs when those countries or regions that have initially low incomes tend to grow more rapidly than ones with high incomes (Samuelson and Nordhaus 2005: 584).

The roots of the issue of unconditional convergence are also frequently traced to ‘A Contribution to the Theory of Economic Growth’ by Robert M. Solow (1956). This work is sometimes regarded as the pioneering one in laying the tenets for the hypothesis of unconditional convergence in the economic growth among the world countries (see, e.g., Abel and Bernanke 2005: 235).

As Mankiw notes,

the diminishing returns to capital [implied by the Solow model] have another important implication: Other things being equal, it is easier for a country to grow fast if it starts out relatively poor. This effect of initial conditions on subsequent growth is sometimes called the catch-up effect. In poor countries, workers lack even the most rudimentary tools and, as a result, have low productivity. Small amounts of capital investment would substantially raise these workers' productivity. By contrast, workers in rich countries have large amounts of capital with which to work, and this partly explains their high productivity. Yet with the amount of capital per worker already so high, additional capital investment has a relatively small effect on productivity. Studies of international data on economic growth confirm this catch-up effect: Controlling for other variables such as the percentage of GDP devoted to investments, poor countries tend to grow at faster rates than rich countries (Mankiw 2008: 258).

Abel and Bernanke note that according to the Solow model, if the economy is open, the absolute convergence gets support from some additional economic forces. Since poorer countries have less capital per worker and therefore a higher marginal product of capital than more affluent countries, investors from richer countries will be able to get greater profits by investing in poor countries. Therefore, foreign investment should provide a more rapid increase in capital stock in poor countries, even if the level of domestic savings in these countries is low (Abel and Bernanke 2005: 234).

It is easy to see that both the ‘Gershenkron’ factor and the ‘Solow’ factor for the faster growth of the peripheral (and especially semi-peripheral) economies are mutually complementary, as capital diffusion tends to be accompanied by technological diffusion (furthermore, capital diffusion is one of the main creators of channels for technological diffusion).

On the other hand, Solow's model implies that output levels per capita should be higher the higher the savings rate in the country or the lower the population growth rate.

Of course, as low income countries tend to have lower HDI and (according to the convergence theory) higher economic growth, the mechanisms above would also produce convergence of HDI scores through the positive influence of the economic development on the HDI growth. Note that in the 1980s and 1990s the convergence theory became the subject of intensive critique as many authors pointed out, rightly, that the global post-World War II pattern was one of general divergence rather than convergence (Romer 1985; Barro 1991; Desdoigts 1994; Lee, Pesaran, and Smith 1997, etc.). Indeed, this was generally the case through the 1950–2000 period (e.g., Malkov et al. 2010; Khaltourina and Korotayev 2010; Korotayev et al. 2010, 2011, 2012). The suggested failure of general (unconditional) convergence was attributed to different factors by various scholars, but human development factors figured prominently in their arguments. Barro (1991: 437) concluded that ‘the relatively weak growth performances of countries in sub-Saharan Africa and Latin America’ and their failure to catch up with the developed countries (i.e. the absence of absolute convergence) could be attributed to the lack of human capital development. Indeed, Barro demonstrated that in his data set of 98 countries during the period between 1960–1985, the growth rate of real per capita GDP was positively related to initial human capital. Cohen (1996: 351) stated that ‘the poor countries have failed to catch up with rich ones because the progress that they have achieved in educating their workers (which is evidenced in the convergence of domestic inputs) is not sufficient to compensate for their poor endowment in the knowledge on which the education of workers stands’. This research suggested the presence of conditional rather than unconditional convergence, which implies convergence among countries with similar basic characteristics, with human capital figuring prominently among those characteristics (e.g., Barro 1991; Mankiw, Romer, and Weil 1992; Cohen 1996). Note that by the 1980s we can already observe convergence among countries with high HDIs. Since that time, many more countries have moved to the HDI > 0.7 range. In general, with regards to human capital indicators, the gap between developing and developed decreased substantially between 1950 and 2000 (see Figs 17 and 18).

Fig. 17. The comparative decrease in the gap in literacy between Europe and developing areas of the world

Data source: Morrison and Murtin 2006.

Fig. 18. The comparative decrease in the gap in life expectancy between the USA and developing areas of the world

Data source: World Bank 2013.

Thus the switch from the conditional to unconditional convergence pattern that we appear to be recently observing seems to be accounted for by the fact that by the late 1990s a very large number of countries began to satisfy (more or less) some major conditions of conditional convergence (see, e.g., Korotayev et al. 2010, 2011, 2012; Korotayev and Khaltourina 2009; Malkov, Korotayev, and Bogevolnov 2010; Khaltourina and Korotayev 2010; Malkov et al. 2010).

This, however, does not appear to account for the above-described growth of the convergence zone. Thus, in the 1980s, countries with 0.6 < HDI < 0.7 tended to grow slower than countries with an HDI > 0.7, whereas in recent years they grew faster (quite in accordance with convergence theory, but obviously there is still a high gap in human capital development level in comparison with advanced countries). One of the possible explanations can be connected to a sufficient degree of economic openness, which we noted is a condition of the conditional convergence model of economic growth (e.g., Ben-David 1993: 653; Sachs et al. 1995: 199 etc.). Indeed, Sachs et al. (1995) noticed a clear convergence pattern in 1970–1995 for countries with open economies. They maintain that ‘the absence of overall convergence in the world economy during the past few decades [before 1995] might well result from the closed trading regimes of most of the poorer countries’ (Sachs et al. 1995: 37). They present evidence indicating that the lack of convergence observed across the world in 1970–1995 can be ‘explained by the trade regime: open economies tend to converge, but closed economies do not. The lack of convergence in recent decades results from the fact that the poorer countries have been closed to the world’ (Ibid.: 3).⁵ Actually this finding seems to be quite congruent with classical convergence theories specified above. Indeed, according to those theories convergence is propelled by the movement of technologies and capitals from the more advanced higher-HDI countries to less advanced lower-HDI ones, where such a movement is much more likely among open economies. Note that by the early 21^st century a very high number of developing and traditional economies had become much more open than before (among other things through the process that is usually denoted as globalization), which appears to be a major factor for the emergence of the general convergence pattern in the first decade of this century.

On the other hand, as Fig. 14 above (and Fig. 19 below) indicates, the highest economic growth rates in the recent decade tended to be observed in countries with middle levels of HDI. In low-HDI countries they were generally higher than in the high-HDI ones, but lower than in countries with middle HDI. This implies that the gap between middle-HDI countries (where most of the world population lives) and the high-HDI ones is decreasing (and this results in the overall convergence trend); but this gap is still growing between the middle- and low-HDI countries (and this makes the overall convergence trend much weaker than it would have been otherwise).

Note that those results are still rather congruent with recommendations produces by Ranis and his colleagues in their series of studies of the relationships between human development and economic growth (Ramirez, Ranis, and Stewart 1998: 3–8; Boozer et al. 2003; Ranis 2004):

If human development improvements are indeed a precondition for sustainable economic growth, government policy and public funding may be necessary to move a nation above the human development threshold level. Nations stuck in vicious cycles, or low-human development poverty traps may need targeted government investments to meet the fixed costs of human development improvements that will lead to later economic growth. These fixed cost investments may include schools, hospitals, and the necessary governance improvements to effectively implement investment projects. The crucial lesson that emerges is that the old-fashioned view of ‘grow first and worry about human development later’ is not supported by the evidence. Improving levels of education and health should have priority or at least move together with efforts to directly enhance growth (Ranis 2004: 10).

Addenda: But Was Not it all Just because of the Crisis?

One may, of course, argue that the positive correlation among middle- and high-HDI countries visible in Fig. 14 for 2005–2010 is entirely an artifact of the 2008–2009 crisis, and not a result of reversal of some deep inequality trends. Indeed, the advanced countries were struck by the crisis most painfully, whereas most developing countries fared much better during the crisis (see, e.g., Grinin and Korotayev 2010). However, Fig. 19 below indicates that a pattern visible in Fig. 14 for 2005–2010 could hardly be accounted for by crisis only, as an essentially similar pattern is also found for 2000–2005.

Fig. 19. Correlation between the HDI value in 2000 and average annual per capita GDP growth rates in 2000–2005, a scatterplot with a fitted LOWESS line

This indicates that our analysis of convergence between high and mid-level HDI countries and a second pattern of divergence in the economic growth rates between mid-level HDI countries and low level HDI countries is not a result of this economic crisis.

NOTES

[1] In fact, Ranis and his colleagues (Ramirez, Ranis, and Stewart 1998: 3–8; Boozer et al. 2003; Ranis 2004; Ranis, Stewart, and Samman 2006) demonstrate that the positive influence of human development on economic growth, on the one hand, and the positive influence of economic growth on human development, on the other hand, tend to form positive feedback loops that could result both in virtuous (more human development – faster economic growth – acceleration of human development – even faster economic growth) and vicious (decline of human development – decrease of per capita incomes – further decline of human development – a continuing decrease in per capita incomes – an accelerated decline of human development) cycles.

2 Note that the HDI scale employed by Myrskyla, Kohler and Billari is not quite identical with the one that we use. The point is that in 2010 UNDP changed the computing methodology for the calculation of the HDI, and, hence, the HDI scores published in Human Development Report 2011 (that we have used) are not quite identical with the ones used by Myrskyla, Kohler and Billari (Klugman 2011). Generally, the same countries tend to have significantly lower HDI scores in comparison with the older ones, hence, the difference between the ranges within which the trend reversal takes place in both cases is much smaller than the one that we apparently observe not taking this qualification into account.

3 Though the Locally Weighed Scatterplot Smoothing (LOWESS) technique employed in Fig. 14 was unable to capture this with those parameters that we used (Kernel: Epanechnikov; % of points to fit: 85).

4 We would like to remind the readers that we use HDI scores computed according to the new UNDP methodology introduced in 2010, whereas Myrskyla, Kohler and Billari used the old ones; whereas the same countries for the same years tend to have significantly lower HDI scores in comparison with the older ones.

5 Note that Sachs et al. quite remarkably state at this point: ‘This is now changing with the spread of trade liberalization programs, so that presumably the tendencies toward convergence will be markedly strengthened’ (Sachs et al. 1995: 3). As we see, this forecast has turned out to be quite correct.

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