Decoupling from rich nations to help poor - Money Matters

Absent huge policy mistakes, the current downturn won’t rival the Great Depression, when US gross domestic product (GDP) dropped by 27% and the unemployment rate reached 25%. Even the worst pessimists don’t expect a double-digit percentage point GDP decline. But there’s a chance of a sort of quasi-depression—which could lead to a multi-decade decline in living standards in rich countries.

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According to Bureau of Economic Analysis’ statistics, US GDP declined 26.6% between 1929 and 1933 while real personal income declined 25.7%. Real personal consumption expenditures declined 18.2%. Per capita, real personal income declined 30% and consumption 23%.

US GDP per capita at purchasing power parity was $45,800 (about Rs22.4 lakh) in 2007, thus 4.58 times the $10,000 average GDP per capita of the world as a whole. World GDP per capita grew by 2.58% in 1960-2000. If world per capita GDP grows at 2.58% per annum, it will equal current US GDP per capita of $45,600 in 60 years.

If global growth continues at 2.58% annually and globalization’s acceleration is sufficient to reduce the gap in global living standards by half in 15 years, the world’s average GDP per capita in 2022 will be $14,653, while 2022’s US per capita GDP, at 2.29 times global per capita GDP, would be $33,556, a 26.8% drop from today.

The gap between developing and developed world living standards is still huge. GDP per person in the US is 4.6 times higher than the world average, according to CIA World Factbook. But globalization—in trade, communications and knowledge—is narrowing the difference.

As yet, this great equalization has been pleasing for the poor and largely painless for the rich. Both poor and rich have got richer, but the poor have got richer faster. That could change. The growth of the poor might start to come at the expense of the rich.

Consider the numbers. Suppose the 4.6-times income gap between rich and poor halves in the next 15 years while the whole world’s GDP keeps growing at the same 2.6% rate it did between 1960 and 2000. If that happens, US per capita GDP would mathematically be 27% lower in 2022 than in 2007—the same fall experienced in the Great Depression, just spread out over many more years.

Statistical projections are not economic destiny, but rich countries can actually get poorer. The average Argentine was 9% poorer in 1945 than in 1929.

It took heroic doses of wasteful macroeconomic policy to get that result. But the current rich-country policies of huge government deficits and tiny interest rates aren’t growth-friendly over the long term.

Unless reversed quickly, this mix tends to lead to larger governments, troublesome budget deficits and—when the debts can’t be paid off—increasingly dangerous inflation. Populist policies could make a bad situation worse. In the US and other wealthy countries, the result could be a downward sloping saw-tooth pattern of output. Each recovery is feebler than the preceding downturn.

As it stands, the poor are closely tied to the rich, so China and its peers are suffering from the troubles in their big export markets. That could change, though, if poorer countries learn to rely less on low-value exports. Instead, they could create a self-sustaining upward spiral of useful investments, improved productivity and rising incomes. Such a decoupling would be highly advisable if rich countries turn to the economic equivalent of self-harming behaviour.

Even if the rich get a third poorer, they will be much richer than their ancestors were in 1929, before the Great Depression started. But the psychological effect of losing income for so many years could be just as great. Talk about depressing.