Gap between rich and poor: not so wide after all?
World leaders have long been concerned about the politically explosive income gap between the rich and poor nations. Envy and despair in the third world, they fear, could touch off revolution, chaos, and war.Skip to next paragraph
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The latest economic research, however, shows that the gap is not so large as previously thought. Moreover, the developing countries have a realistic chance of significantly narrowing the gap with the industrial countries.
''The situation may be somewhat less politically volatile,'' notes economist Irving B. Kravis.
Mr. Kravis, Alan Heston, and Robert Summers, all economics professors at the University of Pennsylvania, have been working for years with the United Nations to obtain realistic purchasing power comparisons for the peoples of the world.
Their findings do not mean the world's poor are any less poor in terms of nutrition levels, health facilities, housing, and the like. The hungry child is just as hungry, noted Mr. Kravis in a telephone interview.
Nonetheless, the research is considered useful in that it makes a more realistic comparison of national income levels than past comparisons based on exchange rates between currencies. Moreover, it offers valuable hope to the world's idealists.
As the three economists state in a newly published paper in The Review of Income and Wealth: ''. . . an important inference is that efforts to narrow the gap in incomes between the developing and industrialized countries is not as hopeless as the exchange-rate converted figures suggest.''
For instance, using the old technique, one World Bank economist a few years back calculated that even among the fastest-growing countries, only eight would close the gap with the rich nations within 100 years if they grew at the same rates they managed from 1960 to 1975. Only 16, he added, would manage this economic feat within 1,000 years. Poor Mauritania would catch up with the industrial countries only in 3,224 years and China in 2,900 years.
In the past, most such comparisons have been based on taking per capita gross domestic product (GDP) for each country - what on average each individual produces in goods and services in terms of national currencies - and expressing that in terms of the US dollar.
The Pennsylvania scholars' project examines the actual purchasing power of the local currency in terms of goods and services for each nation. Then a comparison is made with other nations in terms of dollars.
The results are often startling.
India has a per capita GDP that is only 2.03 percent of that of the United States when measured by exchange rate conversion (in 1975). With the purchasing power parity technique, it becomes 6.56 percent - more than three times greater. The figures for South Korea are 8.12 percent in dollar terms, 20.7 percent when measured in purchasing power. In other words, Koreans really have one-fifth the purchasing power of Americans, not just one-twelfth.
Under the previously used exchange-rate conversion system, the average gap between the rich and poor countries is between 10 to 1 and 12 to 1. But the purchasing-power system reduces that average to 6 to 1, or half as great. ''With this 6-to-1 gap,'' concludes Kravis, ''policies that are designed to help the poor countries grow have a greater chance of succeeding.''
Starting from a higher percentage point in terms of US per capita GDP, the prospects greatly improve that a nation will reach a reasonable level of per capita income level in the near future. For instance, the authors calculated roughly that should India's per capita GDP grow at 7 percent per year, it would take some 50 years to reach the income level of Italy today - if India started from the 2 percent of US per capita GDP assumed by the exchange-rate method. Using the purchasing-power system, it would take only 30 years since India would start at 6.5 percent of US per capita GDP.
Parity with Italy today would mean that a country ''is at a level of income where the dreadful poverty that has characterized the human race through all of history is not found,'' says Kravis. Italy has a per capita GDP about 53.8 percent that of the United States.
India, some economists may argue, is unlikely to see a per capita growth in GDP of 7 percent. But some Asian nations have come close to that. From 1960-78, South Korea grew at a 6.9 percent per capita rate in terms of gross national product (similar to GDP), Taiwan at 6.6 percent, and Singapore at 7.4 percent
Mr. Kravis noted three basic findings:
1. Exchange-rate conversions understate comparative incomes of people in poor countries. This is because the prices of goods and services traded within a nation are lower relative to prices of goods and services in rich countries. An Indian rupee may be worth about 11 cents when converted to US dollars. But in India, it will buy on average probably three times as much as 11 cents would in the United States.
''The poorer the country, the worse the understatement,'' says Kravis.
2. Exchange-rate conversion tends to overstate the share in GDP of capital formation (spending on plant and equipment) in poor countries. Capital goods are traded widely around the world and thus usually have international prices based on foreign exchange rates. But the prices of food, clothing, shelter, and government services - not traded across borders so much - are lower.
For instance, statistics may show that the Philippines spends 20 percent of GDP on capital formation. But in international purchasing power terms, it will only be about 13 percent.
3. Per capita consumption of services, such as hair cuts, movies, education, and health care, will be much greater in poor countries than simple exchange rate conversions of GDP figures would indicate. As any foreigner knows living in such a nation as the Philippines, servants and many other services are cheap in terms of local currencies because of a labor surplus.