A long piece in The Economist recently on the evolution in purchasing power parity between economies of developed and emerging countries. Up until a few years ago, it looked as if convergence would be reached within 30 years, even if excluding Chinese growth. Hundreds of millions of people were drawn out of poverty. Voices have been calling for the post-2015 global development goals to include the eradication of poverty by 2030.
However, the pace of economic growth has been slowing in emerging economies, not just in China, which is managing a difficult transition from low-wage, export-based manufacturing towards an economy dominated by services and internal consumption. However, at the current pace, it will take 150 years to catch up (using as indicator GDP/ person in PPP as % of US GDP).
Convergence was foreseen by economists like Robert Solow. As the main drivers he identified capital influx (as a result of higher interest rates offered by developing countries) and technological progress (enabling emerging economies to leapfrog development stages). Pietra Rivoli saw a ‘race to the bottom’ by poor countries as a way to attract labour-intensive industries, allowing people to abandon agriculture, get access to better services, creating a virtuous spiral.
The main reasons why the convergence has grinded to a near standstill are:
- The peak of manufacturing in a country’s development occurs earlier and is lower than previously. Dani Rodrik attributes this to the growing role of technology, reducing demand for low-wage manufacturing jobs, lowering the incentive for companies to seek out regions with low wages and lowering the share of manufacturing in the total value chain of a product.
- The previous decade was a period of exceptional hyperglobalisation, spurred by strong demand for natural resources, China’s accession to the WTO and strong growth in trade (also outside China).
Rather than the optimistic scenario foreseeing income convergence within a generation, it looks we’re back at the slow grind towards convergence, driven by incremental progress in geography (infrastructure, see work of Jared Diamond), institutions (see work of Daren Acemoglu) and trade (e.g. regional agreements on trade in services).
The article is rather pessimistic in tone, as it considered the gains in poverty reduction as an exceptional feat not likely to be repeated soon. It raises critical questions for countries like India and Bangladesh which are looking to benefit from their demographic dividend and take over some of China’s low-wage industry. It also underlines the need for investments in education.
The New Republic posted an interesting article discussing the merits of university education and whether the universities commonly known as’great’ universities (Ivy League, those on top of the Times Higher Education University Rankings or Shanghai Ranking) offer a truly outstanding education experience. Interestingly, the author taught at Yale, one of those great universities, for 10 years.
The article touches upon many of the problems with organizing, recognizing and measuring quality education. Do read the article in full, but here are some take-aways:
- Elite schools like to boast that they teach their students how to think, but all they mean is that they train them in the analytic and rhetorical skills that are necessary for success in business and the professions. Everything is technocratic—the development of expertise—and everything is ultimately justified in technocratic terms.
- Professors and students have largely entered into what one observer called a “non-aggression pact.” Students are regarded by the institution as “customers,” people to be pandered to instead of challenged. Professors are rewarded for research, so they want to spend as little time on their classes as they can. The profession’s whole incentive structure is biased against teaching, and the more prestigious the school, the stronger the bias is likely to be.
- What Wall Street figured out,” as Ezra Klein has put it, “is that colleges are producing a large number of very smart, completely confused graduates. Kids who have ample mental horsepower, an incredible work ethic and no idea what to do next.”
- Diversity of sex and race has become a cover for increasing economic resegregation. The truth is that the meritocracy was never more than partial. Kids at schools like Stanford think that their environment is diverse if one comes from Missouri and another from Pakistan, or if one plays the cello and the other lacrosse. Never mind that all of their parents are doctors or bankers.
- This system is exacerbating inequality, retarding social mobility, perpetuating privilege, and creating an elite that is isolated from the society that it’s supposed to lead. The major reason for the trend is clear. Not increasing tuition, though that is a factor, but the ever-growing cost of manufacturing children who are fit to compete in the college admissions game. The more hurdles there are, the more expensive it is to catapult your kid across them. Wealthy families start buying their children’s way into elite colleges almost from the moment they are born: music lessons, sports equipment, foreign travel (“enrichment” programs, to use the all-too-perfect term)—most important, of course, private-school tuition or the costs of living in a place with top-tier public schools. The SAT (a college-readiness test) is supposed to measure aptitude, but what it actually measures is parental income, which it tracks quite closely.
“I used to think that we needed to create a world where every child had an equal chance to get to the Ivy League. I’ve come to see that what we really need is to create one where you don’t have to go to the Ivy League, or any private college, to get a first-rate education.”
Indeed, although I regret the decision by the Open University (forced upon by government) to raise tuition to the extent they did, the non-financial barriers to get a first-rate education (despite the fact that, as an online university they are absent from international rankings) are low, making them a force for social mobility.