Catching Up Part 2

I got a hot new idea for a post this week that looks at how other countries are catching up to the US. The idea stemmed from the thought that the world has changed a lot, and many of the economic relationships between other countries and the US might need to be revisited given the shifts in relative economic success. For example, most of our free trade agreements are pretty old and likely reflect the relative poorness of some countries. So I downloaded a bunch of data and then got this sneaking feeling I had already done this topic before. And lo and behold, I did -- back on December 5, 2017.

Since I spent a good bit of time downloading this data I decided to plow ahead and call this one Catching Up Part 2. In Part 2, I focus on GDP per capita in dollar terms. This means I am focusing on what the average person makes or earns in each country. (Warning -- the next few sentences in this paragraph are basically footnote material. You can easily skip to the next paragraph if this kind of material bores you.)  If GDP per capital increases, that means GDP is growing faster than population and it means the average person is doing better economically. Putting each country's amount in dollars means that changes in the exchange rate are reflected in the resulting numbers. Presumably these exchange rate changes help to purge any impacts of relative price changes. That is, if GDP per capita is growing for a country only because of prices, then its exchange rate would depreciate and essentially nullify the impacts of the price changes. I use market exchange rates instead of so-called purchasing power parity rates. (Talk about boring!)

Part 2 also divides the changes in per capita GDP into two time periods -- from 1960 to 1979 and from 1980 to 2016. The World Bank data starts in 1960. I would have preferred to start earlier but the data isn't there. I chose 1980 because so much happened in the world after that date -- including the break up of the Soviet Union, China's emergence in world trade, and many political and economic changes in Latin America. You might think of these two time periods as Post-World War II and Globalization.

The main question posed here today is to what extent the rest of the world caught up to the US economically since WWII and since the onset of Globalization. I chose 17 countries to compare against the USA. The gorgeous table below has several columns. The first three columns contain the GDP per capita for each country in 1960, 1980, and 2016. The next three columns show the share of each country's GDP per capita relative to the US in each of those years. For example, in 1960 the number for Luxembourg is 0.75 meaning Luxembourg's GDP per capita was about 75% of the US GDP per capita in 1960. Notice that by 2016 it had risen to 1.75 or 175% of US GDP per capita. That's a huge increase. The US economy grew by 19 times over that time period. Luxembourg's economy grew 44 times! Note: Luxembourg is a tiny place and was included because of this spectacular result. It used to be a steel-making dynamo but is now a center for finance, knowledge, and space exploration. Enough about Luxembourg.

• What about China? The table shows that in 2016 China's GDP per capita was barely above $8,000. Yes, China is a huge economy but it also has a huge population. Inasmuch, the average person in China makes a lot less than a German ($42,161) but considerably more than the typical Indian ($1,709). Notice that China's main growth came after 1979 -- the share of US went from 3% in 1960 to 2% in 1979 only to rise to 14% in the Age of Globalization. Clearly there is a huge catch-up of China to the USA between 1980 and 2016. 
• Contrast China to Germany's share of the USA. Germany began in 1960 at 91% of the USA, rose a bit more in 1980 to 96% and then fell to 73% of the USA in 2016. Clearly German growth per capita was less than the USA in the Age of Globalization. Many countries were catching up to both Germany and the USA. 
• Several countries gained against the USA in both time periods -- South Korea, Israel, and Chile. Of those, South Korea's advance was dramatic from 5% to 14% to 48%. 
• Japan is interesting because that country had the highest catch-up for the whole time (up by 52%) but nearly all of that occurred in the 1960 to 1979 time period. Its economy slipped relative to the USA from 1980 to 2016. Several other countries had the same pattern -- first rising, then falling against US growth: United Kingdom, France, Mexico, Iran, Canada, and Germany. 
• Argentina, Canada, and Germany were the only countries among this group to have a lower share of USA in 2016 than in 1960. Argentina's share fell by 17%, Germany's by 18%, Canada's by 3%.
• Showing greater than a 10% catchup were Luxembourg, Japan, South Korea, United Kingdom, Israel, and China. 
• Data for Russia and Japan are not available for 1960 and 1980. See the table notes. Vietnam has shown some catchup since 1985. 

The world is catching up to the USA in terms of GDP per capita. In some cases, the result is dramatic. Whether it is relations with China or the European Union, these differences can matter. The world has changed and our larger economic relationships should reflect these changes. Perhaps the US has spoiled some countries by letting them bend the rules. It won't be easy to change long-term habits. But it is worth a try.

https://knoema.com/jesoqmb/gdp-per-capita-by-country-statistics-from-the-world-bank-1960-2016?country=United%20States Real GDP Per Capita in 1960,1980, and 2016 In Dollars and  As a Percent of the USA And Change from 1960 to 2016 Source: World Bank

							Change
	1960	1980	2016	1960	1980	2016	60-16
US	3,007	12,598	57,638	1.00	1.00	1.00
Lux	2,242	17,114	100,739	0.75	1.36	1.75	1.00
Japan	479	10,332	38,972	0.16	0.82	0.68	0.52
Korea	158	1,704	27,539	0.05	0.14	0.48	0.43
UK	1,380	10,032	40,412	0.46	0.80	0.70	0.24
Israel	1,229	6,229	37,180	0.41	0.49	0.65	0.24
France	1,338	12,713	36,857	0.44	1.01	0.64	0.19
China	90	195	8,123	0.03	0.02	0.14	0.11
Brazil	210	1,940	8,650	0.07	0.15	0.15	0.08
Chile	533	2,577	13,793	0.18	0.20	0.24	0.06
Mexico	342	2,802	8,209	0.11	0.22	0.14	0.03
Iran	192	2,440	5,219	0.06	0.19	0.09	0.03
India	81	264	1,709	0.03	0.02	0.03	0.00
Canada	2,295	11,135	42,348	0.76	0.88	0.73	(0.03)
Argentina	1,149	2,738	12,440	0.38	0.22	0.22	(0.17)
Germany	2,751	12,092	42,161	0.91	0.96	0.73	(0.18)
Russia	na	3,429	8,748	na	0.27	0.15	na
Vietnam	na	231	2,171	na	0.02	0.04	na
Russia is 1989; Vietnam 1985

Catching Up to the USA 1990 to 2017

Happy December!

I had so much fun last week with data I decided to do even more this week. This time I have some tables to discuss and they need a little explaining. But first, a little background. The idea today is to shed some light on how much the world has changed in the last 28 years. My data starts in 1990 and looks at changes through 2017. The data come from the International Monetary Fund; it's their measure of real GDP per capita. RGDP per capita is one way to measure changes in the economic welfare of the average person.

This sort of cross-country comparison is not easy. I chose per capita real GDP because it seems closest to the buying power of people in these countries. Country comparisons usually require conversions of non-US currencies to the dollar so all the GDP figures below have been translated to dollars. It is traditional for longer-run comparisons to use an exchange rate called the purchasing power parity value of the exchange rate to the dollar. The IMF used the 2011 PPP value of the dollar for these comparisons. Yes, using PPP is highly debatable but I am sticking with it!

Much has happened in the world since 1990. The Soviet Union imploded, and the Berlin Wall came down. Globalization re-started. Many free trade agreements were consummated. The year 1990 was a time when the USA had a considerable lead on most countries in terms of economic size and competitiveness. Home Alone was the most popular film in 1990, and Windows 3 was released by Microsoft.

Table 1 lists 36 countries I selected to compare with the US. In 1990, real GDP per capita in the USA was nearly $37k. Right behind the USA in 1990 were Germany, Italy, Canada, France, and Japan. Saudi Arabia was ahead of all these countries with a value of $46k. Among those at the bottom in 1990 were two countries freed from the Soviet Union (Lithuania and Latvia) and three Asian countries (China, India, and Vietnam).

Table 2 measures the growth of real GDP per capita of these same countries between 1990 and 2017.  During that time period US per capital GDP increased to almost $54k and grew about 2.5 times. Twenty-two of these countries grew faster than the USA. But three stick out in the list for growing more than the rest, with China growing 10 times between 1990 and 2017. You might say that since the per capita real GDPs of those countries were small in 1990, they had the chance to grow faster and that would be true. But notice that not all of those countries with lower incomes in 1990 grew so fast. Obviously the speed demons had something special going on that helped assist the growth. Latvia and Estonia took advantage of the dissolution of the Soviet Union. Several Asian countries -- especially China, Vietnam, and India -- showed remarkable ability to change and grow.

Table 3 focuses on how fast this group of 24 is closing in on the per capita RGDP of the US. I did a double-take and then some research just to check the top line of Table 3 that shows Ireland's per capita real GDP was $66K in 2017. Ireland's value went from 60% of the US in 1990 to 120% in 2017. Now that is catching up! Where's the Irish whiskey? I am ready to drink to that. No offense intended to JD.

The order of countries in Table 3 is in terms of how much each country caught up to the US. Taiwan is second in the table because it went from 40% to 80% of US per capita RGDP. Countries that closed the gap on the US the most were Ireland, Taiwan, S. Korea, Lithuania, China, Latvia, Poland, Turkey, Vietnam, India and Israel.

Mexico is one of the countries that did not close the gap with the US. Mexico's per capita RGDP was about 30% of the US in 1990 and it remained at 30% in 2017. Canada's values were larger than Mexico's but Canada did not gain on the US either, remaining at about 80% of the US in 2017.

Some countries slid downward. For example, the bottom of the chart is taken by Saudi Arabia whose per capita RGDP was 120% of US in 1990 and fell to 90% in 2017. Other sliders were Italy, Venezuela, Greece, Japan Russia, France, S Africa, Brazil, Haiti, and Germany. Recall, the US grew by 2.5 times in those 28 years. These last countries grew slower than that.

There are many factors that contribute to a country's growth in real purchasing power. Today's blog post does not explain why some countries grew faster than others. But it does show quite a disparity in performance over a 28-year time period. We are not all the same in relative terms as we were when we watched Home Alone in 1990. These differences will reflect the bargaining positions and powers as trade and other relationships are fashioned in the years ahead. Understanding changes in economic power might be useful as we negotiate in the future.

Real GDP Per Capita (Purchasing Power Parity)

Source: IMF: World Economic Outlook Database October 2017

Table 1

Country	1990	2017
Argentina	11,225	18,844
Brazil	10,562	14,127
Canada	31,411	43,875
China	1,515	15,151
Colombia	7,523	13,174
Egypt	6,848	11,842
Estonia (1995)	11,003	28,684
Ethiopia	644	1,926
France	30,421	39,691
Germany	32,067	45,757
Greece	21,442	25,314
Grenada	7,210	13,470
Haiti	2,027	1,650
Hungary	17,015	26,348
India	1,802	6,538
Iran	11,571	18,255
Ireland	21,208	66,196
Israel	20,065	33,037
Italy	30,969	34,606
Japan	30,362	38,878
Korea	11,633	35,897
Latvia (1995)	8,298	24,873
Lithuania (1995)	9,307	29,105
Mexico	12,411	17,753
Poland	10,163	26,658
Puerto Rico	22,286	34,537
Russia	20,801	25,427
Saudi Arabia	45,643	50,365
South Africa	9,899	12,215
Spain	23,662	34,788
Taiwan	15,546	45,412
Turkey	10,834	24,109
UK	27,077	39,755
US	36,999	54,223
Venezuela	14,786	11,290
Vietnam	1,473	6,267
Table 2
Country	1990	2017	Change
China	1,515	15,151	10.0
Vietnam	1,473	6,267	4.3
India	1,802	6,538	3.6
Lithuania (1995)	9,307	29,105	3.1
Ireland	21,208	66,196	3.1
Korea	11,633	35,897	3.1
Latvia (1995)	8,298	24,873	3.0
Ethiopia	644	1,926	3.0
Taiwan	15,546	45,412	2.9
Poland	10,163	26,658	2.6
Estonia (1995)	11,003	28,684	2.6
Turkey	10,834	24,109	2.2
Grenada	7,210	13,470	1.9
Colombia	7,523	13,174	1.8
Egypt	6,848	11,842	1.7
Argentina	11,225	18,844	1.7
Israel	20,065	33,037	1.6
Iran	11,571	18,255	1.6
Puerto Rico	22,286	34,537	1.5
Hungary	17,015	26,348	1.5
Spain	23,662	34,788	1.5
UK	27,077	39,755	1.5
US	36,999	54,223	1.5
Mexico	12,411	17,753	1.4
Germany	32,067	45,757	1.4
Canada	31,411	43,875	1.4
Brazil	10,562	14,127	1.3
France	30,421	39,691	1.3
Japan	30,362	38,878	1.3
South Africa	9,899	12,215	1.2
Russia	20,801	25,427	1.2
Greece	21,442	25,314	1.2
Italy	30,969	34,606	1.1
Saudi Arabia	45,643	50,365	1.1
Haiti	2,027	1,650	0.8
Venezuela	14,786	11,290	0.8
Table 3
Country	1990	2017	Rel to US	Rel to US	Chg Rel
Ireland	21,208	66,196	0.6	1.2	0.65
Taiwan	15,546	45,412	0.4	0.8	0.42
Korea	11,633	35,897	0.3	0.7	0.35
Lithuania (1995)	9,307	29,105	0.3	0.5	0.29
China	1,515	15,151	0.0	0.3	0.24
Latvia (1995)	8,298	24,873	0.2	0.5	0.23
Estonia (1995)	11,003	28,684	0.3	0.5	0.23
Poland	10,163	26,658	0.3	0.5	0.22
Turkey	10,834	24,109	0.3	0.4	0.15
Vietnam	1,473	6,267	0.0	0.1	0.08
India	1,802	6,538	0.0	0.1	0.07
Israel	20,065	33,037	0.5	0.6	0.07
Grenada	7,210	13,470	0.2	0.2	0.05
Argentina	11,225	18,844	0.3	0.3	0.04
Colombia	7,523	13,174	0.2	0.2	0.04
Puerto Rico	22,286	34,537	0.6	0.6	0.03
Egypt	6,848	11,842	0.2	0.2	0.03
Hungary	17,015	26,348	0.5	0.5	0.03
Iran	11,571	18,255	0.3	0.3	0.02
Ethiopia	644	1,926	0.0	0.0	0.02
Spain	23,662	34,788	0.6	0.6	0.00
UK	27,077	39,755	0.7	0.7	0.00
US	36,999	54,223	1.0	1.0	0.00
Mexico	12,411	17,753	0.3	0.3	-0.01
Germany	32,067	45,757	0.9	0.8	-0.02
Haiti	2,027	1,650	0.1	0.0	-0.02
Brazil	10,562	14,127	0.3	0.3	-0.02
Canada	31,411	43,875	0.8	0.8	-0.04
South Africa	9,899	12,215	0.3	0.2	-0.04
France	30,421	39,691	0.8	0.7	-0.09
Russia	20,801	25,427	0.6	0.5	-0.09
Japan	30,362	38,878	0.8	0.7	-0.10
Greece	21,442	25,314	0.6	0.5	-0.11
Venezuela	14,786	11,290	0.4	0.2	-0.19
Italy	30,969	34,606	0.8	0.6	-0.20
Saudi Arabia	45,643	50,365	1.2	0.9	-0.30

Perspectives on World Growth

As you know I like JD and I like data. Taken together, they can produce an interesting evening. The challenge with data is that while there is sometimes a wonderful story among the dollar signs and dots, finding it and then explaining it can be an excruciating process. Even if candidates didn’t say idiotic things about international policy, there is plenty of fun rooting through the numbers published about our trading partners. Our friend Mr Trump is going to do unmentionable things to China as he teaches them a lesson or two. I am not sure that Mr Trump understands much about China or he wouldn’t say such things. But this little exercise today is not really about China or Mr Trump. It is about what happened to our world lately and our place in the future.

That’s a lot to promise so let me slim today’s goal down a little. I looked at one economic indicator for 200+ countries. I expect you to memorize those numbers for a 40 year time time period stretching from 1973 to 2013. My calculator says that is about 8,000 data points. Ha ha. Just kidding. After looking at all that data I chose 22 countries and looked at growth during two six year time periods – 2001 to 2007 and from 2007 to 2013. The data comes from the United Nations and unfortunately does not extend into 2014 and 2015. But you gotta do what you gotta do. Right?

I chose to focus on GDP per capita in dollars. Those numbers are pretty simple and straightforward.  Per capita means that we are looking at national output per person. The UN uses standard market exchange rates to convert all foreign GDPs to dollars. These are nominal GDP figures so they have not been adjusted for inflation. You can find several similar versions of GDP to make these kinds of comparisons. I won’t go into all that and admit my results may be influenced by my choices for countries, time periods, exchange rates, price deflator, and of course the color of my wallpaper. My results are not surprising so I will stick with my choice. I invite readers to explain how my choices might have biased my results.

There are a couple of perspectives that come from doing this exercise. First is that emerging markets are very different from their richer trading partners. Much of what we are seeing in 2015 and will see in coming years stems from these differences. China is a prime example. China might have a really big economy today, but the per capita figures show it is the 20^th richest (from among the 22 countries I chose) in terms of output produced per person. In GDP per capita China ranks just above Vietnam and India but below Cuba. Its $6,626 output per person in 2013 is a far cry from the US citizen who earned almost $53,000.

Okay – I hear my friends saying that emerging markets have not matured and much of what gets produced is outside young markets and gets traded in black markets. Thus much of what they produce never gets measured by the UN. But even if that is true, it surely does not explain the huge difference between China and the USA. China has a big GDP because it has 1.4 billion citizens. When you average production over all those people – urban and rural – they are much poorer than Greeks, Argentinians, Russians, Venezuelans, Brazilians, Turks and Mexicans.  So when a politician expects China or any number of developing countries to behave just like the richer countries, they are comparing apples and apple brandy.

As I show below, China has had very dramatic economic growth. Like many other emerging or developing nations, China remains relatively poor but is catching up. They are catching up to the richer countries because they have transformed their economic systems away from inefficient centrally planned and/or autocratically controlled closed systems – to more open and more market-oriented ones. As you can see below, this has worked to produce amazing growth. As you can also see they still have a long way to go to match the income of people in the wealthier nations.

I once used the terminology “low hanging fruit”. Low hanging fruit means that it is sometimes easy to get started and to make gains – but as you move higher up the tree it gets harder and harder. That is the experience of most of these countries. China’s problems today illustrate the low hanging fruit point. For one thing mathematics shows that rapid growth is simply the result of having growth relative to a very low starting point (ie the denominator of a division). A $100 increase in GDP looks huge if your GDP was once $10. It doesn’t look so great if your GDP was $1,000. For another thing it is simply harder to move up the ladder of transformation. If people are used to getting government subsidized bread for 10 cents a loaf – they resist politically when the government removes the subsidy. China has much to change to be truly market-oriented -- but there is great resistance now for every step they take. 

I could go on and one but let’s try to keep you awake with the numbers I promised.

First comes size.

Two countries earned less than $2k per person in 2013 – Vietnam and India. Cuba.

S. Africa and China were under $10k

In 2013 US and Canada led the group of richer countries with around $53k per person. Germany, UK, and France were in the $40ks and Japan, HK and Italy were in the $30ks.

I chose two comparison periods of five years length – 2001 to 2007 and 2007 to 2013.For these two periods I looked at total percent change – not the average annual change.

The early period showed strong growth for most countries. Russia's GDP per person grew by 331%. With triple digit growth in order behind Russia were Turkey, China, Greece, Brazil, India, S. Africa, Spain, Vietnam and S. Korea. 

Mexico, the US, Hong Kong, and Japan grew by less than 40% in those five years.

Argentina contracted by 2%,

Only three of the twenty-two countries picked up the growth pace in the 2007 to 2013 period: Japan, Vietnam, and Argentina. Japan’s growth went from 4% to 13%. Neither number is very impressive. Argentina grew by 7% after decreasing by 2%. Vietnam grew faster than 100% in both time periods.

China grew faster than 150% in both time periods! But then China has made major news since 2013 by growing much slower.

Most countries had slower growth in the past six years compared to the former.  Four countries had negative rates in the latter period – Greece, UK, Spain, and Italy. France grew by only 2% over these six years. The US, Germany, South Africa, South Korea, Mexico, Japan grew by 10-15%. For these latter countries the growth in the second period was at most a third of the growth in the first one. Remember, these are growth rates for the whole period -- not per year. 10-15% nominal GDP growth over five years is not good. 

That’s a lot of food for thought. But the numbers clearly show a few things. First, emerging markets once led the growth parade. Second, they have a very long way to go to catch-up to the richer nations in terms of income. Third, growth in all countries was pretty much smashed by the last global recession. Fourth, voters and citizens around the world feel imperiled by recent economic events and will put a lot of emphasis on growth. This leaves a lot of room for policy mistakes. 

Table Country Comparisons: GDP Percapita

Level in 2013 and Growth Rates 2001-2007 and 

2007 to 2013

2013	01 to 07	07 to13	Country
14,760	-2	75	Argentina
11,199	130	56	Brazil
52,270	87	18	Canada
6,626	157	152	China
38,039	24	25	Hong Kong
6,985	83	35	Cuba
42,339	84	2	France
45,091	76	10	Germany
21,768	133	-24	Greece
1,548	128	49	India
35,243	82	-5	Italy
38,528	4	13	Japan
10,293	39	12	Mexico
26,482	105	12	Republic of Korea
14,680	331	62	Russian Federation
6,936	126	15	South Africa
29,685	116	-10	Spain
10,972	205	18	Turkey
42,423	88	-13	United Kingdom
52,392	29	10	United States
12,213	69	47	Venezuela
1,868	105	128	Viet Nam