The Economic Lead of the United States

Source: The Economist

Read the full article "Climbing back" in The Economist. (January 19, 2006; Subscription required.)

The economies of what used to be called the “third world” are regaining their ancient pre-eminence

"According to estimates by The Economist, in 2005 the combined output of emerging (or developing) economies rose above half of the global total.

"This figure has been calculated from the International Monetary Fund's World Economic Outlook database. We have adjusted the IMF's numbers in two ways. First, we have taken account of China's recent upward revision of its GDP by 17%. Second, we include the newly industrialised Asian economies (South Korea, Taiwan, Hong Kong and Singapore). These countries might well now be classed as developed, but should surely be counted in any estimate of the long-term success of developing countries. If you exclude countries once they prosper, developing economies' share will never increase.

"We have used the IMF's method of converting national GDPs into dollars using purchasing-power parities (PPPs) instead of market exchange rates."

The growing clout of emerging economies is in fact returning them to the position they held for most of history. Before the steam engine and the power loom gave Britain its industrial lead, today's emerging economies dominated world output. Estimates by Angus Maddison, an economic historian, suggest that in the 18 centuries until 1820 they produced, on average, around 80% of the total. But they were then left behind by Europe's technological revolution. By the early 20th century their share had fallen to 40%.

(see chart above)

The UN Economic Commission for Europe notes:

There had already been unexpectedly strong growth in western Europe in the five years following the end of the war, such that the large real income gaps which existed among most countries in 1945 had been reduced to their pre-war levels by 1950. On this criterion, 1950 can be said to mark the end of reconstruction and the start of a new era in western European economic history. But the real income gap vis-à-vis the United States, the technological leader, was very large in 1950, amounting, on average, to some 55 per cent (table 5.3.2). This gap indicates the large potential for technological catch-up growth which existed at that time. Real GDP per capita in western Europe rose by some 4 per cent per annum between 1950 and 1973. In contrast, it rose by only 2.4 per cent a year in the United States, while in Japan the average annual increase was some 8 per cent.

I also want to quote from one of the many papers on whether the incomes of nations are converging or diverging: "Growing apart: global divergence characterising the evolution of cross-country incomes" by David Mayer-Foulkes:

The discussion of convergence has occupied a prominent place in the study of economic growth across countries for over a decade. The finding of a significant, negative 'convergence coefficient' has been one of the most robust in cross-country growth regressions......Evans (1995) confirms convergence in a large group of medium- to high-income countries, at least to parallel growth paths.

He summarizes his results as follows:

the sample of non-mainly-petroleum-exporting countries having market economies during the period 1960-1997 is divided into five clusters of countries by a regression clustering algorithm according to the levels and rates of change of income and life expectancy. The five clusters correspond to advanced countries, especially fast growing countries, and three tiers of less developed countries with qualitatively different development paths.......the five-club convergence model is much more significant than the one-club model, and the distributions of countryspecific convergence regression coefficients are significantly different across groups of countries.

The US still has the largest and most technologically powerful economy in the world, with a per capita GDP of $41,800; in 2004 (using World Bank figures) its GDP was more than 28 percent of the world's total. However, at the end of World War II, the United States held an unprecedented economic position; its GDP exceeded that of the UK, France, Germany, Italy, Austria, the USSR and Japan combined (source). The post-war period, which has been described as "club convergence" saw the developed nations regain economic power, as compared with the United States. The current rapid economic growth of India and China, and the earlier growth of the various Tigers, suggests the club is growing.

During the Cold War, the United States and Russia were seen as two super powers. Today the military power of the United States seems unmatched, and it is seen as the one remaining super power. But today the economy of Europe is considerably larger than that of the United States, and one would hope that the European Union will increase its role in international peacekeeping accordingly. As India and China grow economically, one might expect their power to grow in other ways as well.