The greatest challenge of the 21st century will be to narrow the income disparity between rich and poor nations, writes Martin Wolf

None of the readers of this column has much chance of being alive at the end of this century. But suppose, for a moment, one was. What would give most pleasure?

y answer is simple: that the economic opportunities now available to a small proportion of humanity would have become available to all. The question, as the world's movers and shakers congregate in Davos for the first meeting of the World Economic Forum this century, is what needs to be done to promote this end.

Two centuries ago, the lives of the overwhelming majority of human beings were, in the pungent words of Thomas Hobbes, "nasty, brutish and short". But then in a small island off the western end of Eurasia began what the great US economist, Simon Kuznets, called "modern economic growth". By this he meant cumulative rises in real incomes per head.

This was so much newer than what is today called the "new economy" that almost all the great economists failed to realise what was happening. Yet, according to Angus Maddison, the economic historian, since 1820 world population has increased six-fold and world real output 50-fold.

But the distribution of those huge gains has been highly unequal, not within societies, where the opposite has been the case, but between them. At the beginning of the 19th century, the ratio of real incomes per head between the world's richest and poorest countries was three to one. By 1900, it was 10 to one. By 2000, it had risen to 60 to one.

Today, world GDP per head (measured at purchasing power parity) is about $6,000, with the richest country at $29,000 and the poorest at $500. The billion people in the high-income countries earned just under 60 per cent of world income, the 1½ billion in middle income countries a little over 20 per cent and the 3½ billion in low income countries the remainder.

Why has this huge divergence occurred? To the naive mind, the answer is exploitation. Yet even a second's thought shows this is implausible. First, predation is a constant of history, yet never before did it lead to self-sustaining growth anywhere. Second, there is no logical connection between the exploitation and the flow of scientific discovery, invention and innovation underlying long-term growth. Third, the world's poorest societies and peoples have been not so much exploited by the modern economic system as almost entirely outside it.

There is a far better explanation: that the preconditions of economic growth have diffused slowly. Neither the characteristics of the societies that have found it easiest to initiate growth, nor the pattern of diffusion, nor the time it has taken to occur is surprising. Two centuries is a relatively brief period. The agrarian revolution was incomplete some 8,000 years after it began.

In a characteristically brilliant forthcoming article in the Journal of Economic Perspectives, Robert Lucas, the Nobel laureate, has analysed the diffusion of growth. In his simple model, a rising number of societies starts on the ladder with time; each successive wave grows faster than the last; and once they catch up, growth slows to the rate achieved by the leader.

This simple model predicts that: at any time there is a group of converging countries, with others left behind; that the rate of global growth first accelerates, while cross-country inequality grows; that then the rate of global economic growth slows, while inequality shrinks; finally, that world incomes converge again, but on far higher levels than ever before. In fact, the world's highest ever growth was achieved between 1950 and 1973, one and a half centuries after the process began.

Intriguingly, another paper, by Andrea Boltho of Oxford University and Gianni Toniolo of the University of Rome, also indicates that global income inequality reached its maximum in the 1970s.* As China and India began to grow quickly, global inequality shrank.

The challenge then is to speed up this process of diffusion and convergence. The basics of what is needed are also clear. At the global level, there needs to be sustained growth and continued international economic integration. The two most successful periods for catch-up - the 40 years before the first world war and the half century after the second - share these characteristics.

eanwhile, the laggards need to be helped to create the domestic preconditions. This means macro-economic stability, openness to trade and encouragement of inward direct investment. Many of them, above all in Africa, also have the task of building institutions for take-off: political stability, effective and honest administration, secure property rights and basic education and health. Fortunately, while difficult, all this is far from hopeless. What has been achieved in many countries can surely be achieved in others.

The worry is not that it is impossible, but that the chance will be thrown away. A mixture of complacency among those responsible for today's global market economy, with opposition from those who detest everything about it, could destroy the chance of faster convergence.

It is difficult to miss the signs of folly: the insouciance with which the Seattle ministerial meeting of the World Trade Organisation was allowed to collapse; and the refusal to accelerate liberalisation in favour of exports from developing countries. Nor can one miss the widespread assumption, bred of two decades of experience, that already huge rises in stock market valuations can continue indefinitely; or, for that matter, the failure to recognise the enormity of the errors made by global financial players in the run-up to the Asian crisis.

If those actively involved do make serious errors, there are, alas, plenty of opponents of the market economy only too ready to seize upon them. Intellectually and morally, the arguments of those who propose the notions of zero growth or local self-sufficiency are devoid of merit. Yet it is not these arguments themselves that matter, but the passion that informs them.

Wisely managed, the liberal world economy that emerged, for a second time, in the late 20th century gives the best possible background for desired global economic convergence. But the great errors of the 20th century stand as a warning. All that is needed is a little courage and a modicum of wisdom. Above all, let what one observer called "Davos man" (and woman) avoid complacency and suppress euphoria. These, above all, now threaten our great opportunity for sustained growth and convergence.

* The Assessment: the Twentieth Century - Achievements, Failures, Lessons, Oxford Review of Economic Policy, winter 1999 martin.wolf@ft.com


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