Pritchett, L “Divergence, Big Time” in The Journal of Economic Perspectives, Vol. 11, No. 3. (Summer, 1997), pp. 3-17.

From here.

The topic of this paper is the massive divergence which has been observed between currently rich countries (European Countries and their offshoots plus Japan) and the other countries. No grouping is really all that accurate, but the theme of divergence in growth rates, productivity and wealth split the world into two fairly distinct groups.

The period discussed is that since 1870s. This if often chosen as a start date for “modern” economic history. First of all, for rich countries decent economic information is available more or less uninterrupted since this date. Also 1870 follows on from a series of major events, US Civil War, Franco-Prussian War, and Japan’s Meiji Restoration.

The above table is used to illustrate a number of things. First of all, there was some sort of Golden Age for capitalism between the end of the war and the end of the 1970s. There is a strong convergence within this subset of countries; the poorest six countries in 1870 had five of the six fastest national growth rates for the time Period. 1870 to 1960. The five richest in 1870 had the five slowest growth rates.

Secondly, Even with the catch up of the poorest countries growth rates are relatively uniform: the standard deviation of the growth rates is only .33. Evans (1994) formally tested the hypothesis that the growth rates of European countries and their offshoots (not Japan) were equal in the period and could not reject it.

Thirdly, although there has been substantial variation over time there has been no substantial acceleration of growth rates over time. Growth rates have been remarkably stable.

Unfortunately all these observations are drawn from a self selecting group of countries which are now rich; the observation they have grown strongly and consistently over the last 100+ years and that they are now rich is almost tautological. Countries like Japan which did converge are included, but countries which didn’t like Argentina are not.

A Lower Bound for GDP

There is a paucity of data for historically poor for a variety of obvious reasons. However, there is a physical limit on how poor a country can be, “even deprivation has its limits.” Pritchett argues that $250 expressed in 1985 purchasing power equivalents is the lowest GDP per capita could have been in 1870.

No one has ever observed lower living standards in the modern poor world; this level is set well below modern levels of “absolute poverty” and is at the limit of viable nutritional intake; a lower standard of living and the population could not expand.

PPP is very important in measuring living standards in poor countries (see disclaimer here), tradeable goods cost more or less the same everywhere, but haircuts etc are much cheaper in poor countries. $70 in 1985 US market exchange rate dollars = our P$250 minimum GDP per capita level.

Divergence, Big Time

If you accept: a) the current estimates of relative incomes across nations; b) the estimates of the historical growth rates of the now-rich nations; and c) that even in the poorest economies incomes were not below P$250 at any point-then you cannot escape the conclusion that the last 150 years have seen divergence, big time.

If we assume that all countries have grown at roughly the same rate and backcast from now then we come to the conclusion that soem countries had incomes lower than P$100 in 1870, since this is impossible then we must have seen massive divergence.

The magnitude of the divergence is staggering. From 1870 to 1990 the average absolute gap in incomes of all countries from the leader had grown from $1,286 to $12,662, an order of magnitude.(pp 9-12 are well illustrated and should be read in full). Bairoch (1993) argues that developed countries and developing countries were largely economically equal as late as 1800, this implies and even more startling era of divergence since.

Divergence is not a thing of the past

There are a number of countries catching up and growing at historically unprecedented rates (Korea, Taiwan, etc), but manuy continue to stagnate and some have even regressed (i.e. negative growth rates since 1960). Many countries have seen slowdowns and some have seen “meltdowns.”Annual growth rates amongst developing countries from 1960-1990 range from -2.7 percent to 6.9 percent.

There has been no obvious acceleration of growth in most developing countries, either relatively or absolutely, and no reversal in divergence. Almost nothing that is true about the growth rates of developed countries is true of that for developing countries.