Arnold Kling  

The Great Factor-Price Equalization, Again

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Dani Rodrik and Timothy Taylor both have posts, including charts, comparing growth in emerging economies with growth in developed economies.

Rodrik (pointer from Mark Thoma) is writing about the past twenty years.

For the first time ever, developing countries as a group grew have been growing faster than industrial countries. Not only that, as the figure makes clear, the growth differential between the two groups has been widening in favor of the poor countries.

Read the whole thing.

Taylor talks about the future.

In 2009, the U.S. is the world's largest economy. By 2050, U.S. economy will be about 2.5 times as large--and is projected to be in third place in absolute size, behind China and India. What other countries move up the rankings notably by 2050? Brazil, Mexico, Indonesia, Turkey, Nigeria, and Vietnam. To my 20th century mindset, some of those countries just don't seem like global economic heavyweights. Time to start adjusting my mind to the coming realities.

This is based on projections made by PwC (They seem to have rebranded themselves away from Price Waterhouse Coopers--I am not sure when or why).

Again, I want to suggest that there is a connection between this trend and the stagnation of median incomes in the United States, and even to the decade-long drop-off in employment here. New patterns of trade are developing that are reducing the advantage that a person enjoys merely for being located in the United States. There still are advantages, as evidenced by the excess supply of people who wish to immigrate herte. However, the Great Factor Price Equalization is underway, thanks to the fall of Communism, the rise of the Internet, and sporadic progress in institutional development in the emerging-market countries.

Incidentally, if there were justice in the world, Timothy Taylor's blog would be one of the top economics blogs. His posts represent my ideal of what an economics blog should be. Boycott the mudball-throwers. Read Conversable Economist instead.

Comments and Sharing

COMMENTS (6 to date)
Sergei writes:

Neoclassical growth models predict that poor economies will converge with rich economies.

In theory, Heckscher-Ohlin will hasten this convergence. But empirically, the FPET has had little measurable effect on median US wages. See for example

Costard writes:

All sorts of things grow in springtime that would never make it through the winter.

The progress of free trade in past years has not only allowed poorer countries to take advantage of their lower costs and cheaper labor, it has convinced them that these advantages must be maintained. Consequently we see export economies doing everything in their power to keep costs down relative to import economies via subsidies and currency manipulation, and to keep labor cheap through state action -- whether that be forbidding organization, growing the labor pool by encouraging (or forcing) migration to cities, suppressive labor laws, or etc. The economic progress of these countries has not been reflected in a liberalization of their societies. They are unjust, corrupt, and place little value in personal freedom and rule of law; all of which is evident to foreigners who do business there. How will such uneven and unjust societies, opened by trade and become self-aware, fare in the event of a less seasonable climate?

This is capitalism in a pot. It is cute and it markets well to those in the West who place little value in the liberty they enjoy and great value in physical things. But ultimately it is a twisted thing with a short lifespan, and expecting flowers in 2050 is somewhere between optimistic and delusional.

dha writes:

"Again, I want to suggest that there is a connection between this trend and the stagnation of median incomes in the United States, and even to the decade-long drop-off in employment here."

Why? It's plainly a simple result of other countries adopting more Western-type institutions following the end of the Cold War. The 'problem' is not with America, but rather with its rivals no longer unnecessarily hobbling themselves. Growth rates of 8-10%, or anything like, are simply not possible in leading economies; only convergence permits this. No issue with the US can have a decisive influence here.

kiwi dave writes:

To my mind, the more interesting thing about the PwC projections are per capita, rather than total income -- PwC predicts that by 2050 (which is not all that incredibly far away when you think about it), India will have per capita GDP in the high 20s ('000 current USD) -- pretty similar to South Korea now -- and that Russia will have overtaken Italy in per capita income. Big calls, to my mind.

Arnold Kling writes:

This is the second time that the Lawrence paper has been thrown at me in the comments. But it is about U.S. wages in the 1980s, and my focus is more recent than that.

Joe Cushing writes:

There has been a collaps of economic freedomm in traditional 1st world nations and although the US didn't lead this, we are following the example set by Europe. People oftem cite Europe as a reason to continue down the path of less freedom. Meanwhile, in the three emerging continents, economic freedom is growing. America is now the 9th freest country on Heritage's list. Just a few years ago, we were number 3. At the rate things are going, the migration flow will reverse and people will leave the US. Maybe we won't have far to go, Canada has passed us in Economic freedom.

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