ECONOMIC DEVELOPMENT HOW WE MEASURE IT, HOW IT VARIES

AROUND THE WORLD

Incomes Around the World

Sustainable development weve seen has three major aspects, economic
development, broad-based inclusion and environmental sustainability, all
supported by good governance. But what do we mean by economic
development?

I want to introduce the main concept of how we measure economic

development. Of course, there are many different aspects of a true and proper
understanding of economic development, but we tend to use a short hand, and
that is called the gross domestic product of a country. The gross domestic
product has three words and three concepts in it. It means the total production
taking place within the geographic boundaries of a country in a given year, so
the gross of the gross domestic product means youre measuring everything
that is taking place within the country. Youre not taking into account in that
measurement the depreciation of capital and so forth which would give us a
different concept called net domestic product. Domestic signifies the fact that
were talking about a geographic area, and were concerned with how much
economic activity or production takes place within the boundaries. Of course,
usually were talking about a country, but we could be talking about the
production of a city or a region. And sometimes of course, we also want to talk
about the gross world product which is adding up the domestic production
across all of the countries of the world.
And product, or production, signifies the fact that what were interested in
measuring is not the accumulated wealth, the wonderful buildings and
monuments and roads and infrastructure, the natural beauty, of a country, which
may tremendously raise the quality of life. Were interested in the actual flow of
production in a given time period. Now, for most purposes we look at a year,
though when policy makers are trying to understand short term dynamics of
unemployment and production, theyre interested often in measuring the gross
domestic product even over a quarter of a year. Were going to look at national
measurement or countries. We are going to look at the annual measurement.

Now, one more critical point about measuring the gross domestic product. In
general, we are interested in getting a sense of the standard of living of a
country, and to do that we take the total production in the country over a given
time period, usually the year, and divide it by the population so that were
interested in the gross domestic product per person, or per capita.

Why is that? Well, of course, larger countries produce more because there are
more people. There are more workers, but if we simply were to compare
countries in terms of the total production, wed find that highly populous
countries would have higher production but we wouldnt learn very much about
whether the living standards of those larger countries is really higher than the
living standards of a small country, which may produce a little bit but quite a bit
for each person in the economy.

So when we think about economic development, we tend to think about

the gross domestic product per person. Let me emphasize again. Thats
not really a comprehensive measure of economic development. We want to
know whether people are healthy or not. We want to know levels of education.
We want to know other indicators of well-being, but as a shorthand, when I want
to get a sense of a countrys overall level of economic development, I start by
looking at the gross domestic product per person because its going to be a
pretty good indicator of where things stand. And indeed thats what the keeper
of the accounts, which is the World Bank, does.

The World Bank keeps very systematic tabulations on gross domestic product
per person, and it classifies countries in a way that is also extremely helpful for
us. The World Bank gives three categories of countries, high income countries,
middle income countries and low income countries, and it puts each nation into
one of those three bins, depending on its measured gross domestic product per
person.
Roughly speaking, a low income country is a country where the domestic
production per person is at a level below a threshold of about $1,000 per person
per year. In other words, roughly $3 per day, and a middle income country is a
country that is in a band between $1,000 roughly per person and about $12,000
per person per year. And the high income countries are countries that are above
the $12,000 per person threshold. There are then refinements. The middle
income group which is quite a big one, is divided between the upper middle
income and the lower middle income, with the dividing line of about $4,000 per
person per year.

The World Bank categories provide us with a, a useful depiction, a, a good map
of the world, and if you look at the map in front of you, you can see that those
few areas that are shaded blue are the high income countries, the US and
Canada, Western Europe, Japan and Korea, Australia, and New Zealand, and a
few other parts of the world. Add up the population of that high income group,
and you find that its about 1 billion of the roughly 7 billion people on the planet.

So its about 1 in 7 in the world, roughly 15% of the worlds population living in
high income countries. Then take a look at this large middle group of beige
colors, and you see that that covers a wide expanse of the world. And indeed 5
out of 7 in the worlds population, roughly 5 billion of the 7 billion people on the
planet, are in the middle income category. So thats a big middle, and thats
divided between an upper part and a lower part, roughly half and half.
Approximately 2.5 billion people in the upper middle income category and about
2.5 billion in the lower middle income.
Then look at the countries shaded red. Those are the poor countries, the low
income category, and by simple arithmetic, we can say that 7 billion minus the
one in the high income, minus the five in the middle income. That leaves about
1 billion people approximately living in the low income countries.

Weve already noted that the low income countries are heavily concentrated in
tropical Africa and in South Asia, with this scattering of low income countries in
other parts of the world, but in our world today, the poorest countries in the
world are concentrated in these two regions, and most of the worlds poor
people therefore live in those regions where the countries are in the low income
category.

Now, let me mention one more category. Its not a World Bank category. Its a
United Nations category but also very important for us to remember. Even within
the low income countries, there are distinctions. Theres a subgroup within
the low income countriesthats in pretty desperate shape.
Not only are they poor, but the human conditions of disease, of education
levels, of social instability, are very bad. And moreover this subset of countries
is highly vulnerable to droughts, to floods, to conflict, to, to violence. So these
are a group of highly vulnerable, very poor countries, and the UN has classified
them as the least developed countries. There are about 50. Right now the list is
48 but it goes up and down depending on how countries are performing. Among
the least developed countries, the poorest of those are again heavily
concentrated. You see that in tropical Africa theres a large number of least
developed countries.

There are several in Asia, and if you look closely at the map, youll notice
something very telling for us. Afghanistan, Nepal, Bhutan, Laos, landlocked
countries. This is not by accident. Were going to see that economic
development depends on international trade. Being landlocked is a problem.
Youll also notice a number of small island economies in the Pacific, and also
Haiti. Small island economies also can be quite vulnerable and part of the least
developed countries.

We know what these categories look like. Intuitively its good to remember
London and my own hometown New York City among the high income
countries. Middle income countries, io or San Paulo in Brazil, where you have a
tremendous amount of development and wealth, but you also have the foreign,
the slums. Countries that are in the middle of the pack often doing very well in
raising income levels. China, another major world economy that is a middle
income country.

The poor countries, we know what they look like also because theyre more
rural. Small holder farmers. Peasant farmers scratching out a living and hardly
making ends meet. And for the least developed countries, Somalia,
unfortunately in its tragedy in recent decades really a clear example of what it
means to be among the poorest of the poor and not only desperate poverty,
hunger, lack of education, low life expectancy, but lots of violence and lots of
political instability as well. Let me mention one more important detail for us in
terms of measurement.

For everything that Ive said so far in measuring the gross domestic product, the
total production is added up and divided by population to get the gross domestic
product per person, and since countries have their own currencies, they have to
be converted to a common standard. And so the exchange rate is used to
convert the national currency into a common, typically U.S. dollar standard, and
thats how we make the comparisons in a common currency.

But theres another translation that can also be useful. I want you to be aware of
it because we will be referring to it many times, and that is to make one more
adjustment for the difference of costs or prices in different countries. If you buy
an automobile or a television set almost anywhere in the world, price will be
fairly similar because these are goods that are traded internationally, and they
have a similar price when expressed in dollars in any part of the world.

But if you go to rent an apartment or get a haircut or go to a movie or park a

vehicle in the center of town, youll find the difference in costs extraordinary. In
London or in New York or Tokyo or Paris, the prices would be sky high, but in a
poor setting in Mogadishu or in Akrah or in, Bamako, Mali, the price of a haircut
might be a 20th or a 50th what youd, pay in a salon in Paris. So one has to take
into account that simply measuring the output and converting to dollars might
not give a full comparison because the purchasing power in a poor country
might be a little bit higher than is indicated, so we often make one more
adjustment called purchasing power adjustment, or purchasing power parity to
take into account the relative price levels.

When you do that you find that poor countries are still quite poor, but theyre not
quite as poor as they look. Take a case of a country like Malawi, a poor country
landlocked in tropical Africa. Measured in the market prices and market
exchange rate, its per capita income is around $250 per person per year
compared with $50,000 per person per year in the United States. Malawis
extraordinarily poor. Adjust for the lower costs of living in Malawi, and you find
that Malawis still very poor, but maybe the income with the purchasing power
adjustment should be around $900 to $1,000, roughly 4 times higher than
simply using the market prices. So thats a system called purchasing power
parity, measures of gross domestic product per person.
Its a lot of words. Its a lot of concepts. The main point that I am stressing is that
we measure economic development in short hand by the gross domestic
product per person. We adjust obviously for population. We adjust for currency,
and very often we want to adjust for the different price levels. Then, we can
classify countries, and we can study the question, why are countries at different
levels of development? How do those different levels of development relate to
other things that matter a lot for people, their health, their well-being, their
happiness, and what can countries do that are at the low end of this curve, the
least developed countries and the low income countries, to raise their living
standard to achieve economic growth, that is a rise of gross domestic product
per person? Fast enough to narrow the gap significantly with the wealthier and
the higher income countries. That of course is one of the key challenges of
sustainable development.

Urban/Rural Inequality
Weve looked at gross domestic product per person as a, pretty good summary
measure of how to categorize countries in, economic development. But thats
an average for countries. Countries have great variation within them and its
very important, especially in view of our commitment to social inclusion, to
broad-based prosperity to understand the variation and the inequalities within
countries. Perhaps the starkest kind of variation within countries is
the difference of rural and urban life.
In almost every country in the world with just a few exceptions parts of the
population live in. Rural areas, other parts live in urban areas and often their
lives are very different. And, since many countries are in a transition, moving
from rural to urban life, its quite important for us to understand the differences
of the rural and urban living.

What it means in terms of well being. Income levels kinds of activities. The
starting point for us is that, before the industrial revolution, before the era of
modern economic growth, virtually the entire world lived in rural areas. Perhaps
90%. Even more of the worlds population were small holder farmers or peasant
farmers eking out an existence by trying to grow enough food for themselves,
their families and perhaps for the marketplace each year. And we know that
when we think about that era, we could think about bucolic. England we see it in
the great masterpieces of the 16th and 17th century landscape painters, but we
can think about the countryside as characterizing if, almost all of the country.
And that kind of rural scene.

Is still very familiar in many parts of the world. In Africa as, in this village site in
Malawi and of course in many rural areas of small holder farmers. Rice patty
farmers all through Asia. But more and more, the world looks like this. Whether
its the huge crowds of Seoul, South Korea New York City skyline, the bustling
crowds in Beijing. The world is becoming more and more urbanized, and this is
changing lives in fundamental ways. It also leading is leading to vast
differences. And big inequalities within countries as well. What do we mean by
urban?

Youll be surprised to know, there is no official definition of what it means to be

an urban area. Generally, the United Nations, which keeps the books on the
proportion of the world thats rural and the proportion of the world that is urban.

Relies on national definitions which differ across countries. Generally speaking,

an urban area is a place where a few thousand people live in a relative, densely
settled area. Of course, up to millions of people living in a densely settled area.
But, that minimum threshold, whether its 2,000 people, or 5,000 people that
defines whats urban versus whats rural depends on each country.
The difference between rural and urban has some pretty basic points to it that
are very important for us to remember as we think about the process of
economic development. And as we think about the nature of inequality within
countries.

First huge differences what people do in rural areas versus what they do in
urban areas to earn a living is quite distinct, overwhelmingly people living in
rural areas are in farm families generally. These families own some land or work
some land, and agriculture is the mainstay of rural areas, whereas industry and
services are the mainstays of urban areas. What that means is that as.
Countries experience economic development with a rising proportion of the
population in urban areas and a shrinking proportion of the population in rural
areas.

That also signifies that a rising proportion of the labor force, of the workers, are
in industry and services and a declining proportion. Are in agriculture. This is a
nearly universal trend as part of the process, of gross domestic product per
capita rising, a rising share of the population, working in industry and services
as opposed to agriculture.

Generally speaking, though it can vary, rural areas are poorer. Than urban
areas. So income per person tends to be higher in urban areas than in rural
areas and thats one of the magnets that is pulling people in migration children
of farmers that are moving from the farms to the cities in search of work. And
higher incomes.

Generally the location of rural and urban areas differs when you think about it.
Urban areas tend to be at the coasts. They tend to be where its easier to
engage in trade. Whereas rural areas tend to be where its propitious to grow
food often. In the interior of the country. So, even the balance of rural and urban
is also, typically, a balance of interior and coastal orientation of the country.

Of course, population density, very different. Its low in rural areas, a high land
to person ratio. Whereas the land per person in an urban area can be very low,
urban areas can be packed with the thousands of people per square kilometer.
The quality of public services tends to differ its harder to provide electricity,
piped water sewerage systems in rural areas where populations are disbursed.
Relative to urban areas. This is one of the reasons why income levels tend to
be higher in urban areas.

And one other factor that is quite notable is that the fertility rates meaning how
many children note woman tends to have on average in this society tends to be
higher in the rural areas then in the urban areas. There are many reasons for
this, but one is that children are often seen as good economic workers for the
farm, where as in an urban area, children are expensive. Children are going to
school, not working on a farm, and the result is that often when households
move from the rural to urban areas they also choose. To have fewer children.
Now, if you look at the map of the proportions of populations in urban and rural
areas, it looks a bit like the map of income per person.

The richer parts of the world tend to be more urban, the poorer parts of the
world tend to be more rural. But looking at the map you can notice a few things.

First, the Americas both North and South America, very highly urbanized
societies. 70 or 80% of the population. Again tropical Africa still quite rural,
perhaps 65 or 70% of the population living in rural areas only. 30%, or so of the
population living in urban areas. One thing that is for sure, though, everywhere
in the world, urbanization is proceeding rapidly. Its part of the economic
development process, and if you look at the map of the growth rates of the
urban areas, that is the. Annual proportionate increase of populations living in
urban areas.
Its actually in Africa where urbanization rates are extraordinarily high.
Sometimes urban areas growing 5% per year. How long does it take for an
urban area to double? If its growing at 5% percent per year. Remember the rule
of 70 that I entioned earlier? Divide 70 by 5%. Thats 14. Its 14 years then for
an urban area to double. For a city of 1 million thats growing at 5% per year to
become a city of 2 million.

Thats a pretty short period of time. You can see that the growth rates of the
rural areas is extraordinarily high. The worldwide trend, is for urbanization. On
net, as the worlds population grows, another billion people by 2025, another 2
billion people. Roughly by 2045, on average that additional 2 billion of world
population taking us from 7 to 9 billion will be an extra 2 billion in urban areas.

Because the worlds rural population has probably peaked at this point, it may
even be declining in absolute numbers, whereas the worlds urban population is
going to continue to soar. And the proportion of the world living in urban areas is
going to rise from the current proportion of roughly half and half, 50 %, to
perhaps 70% of the world living in urban areas.

By around 2030, you can see that environmental sustainability healthy cities,
are going to be a core challenge of sustainable development, and as that
process of urbanization takes places. The country side is also transformed. You
look at a country like the United States where the rural population is maybe only
10 to 20% and where the farm population is only around 1% of the entire labor
force. Farmers are very efficient working huge farms like you can see here in a
wheat farm of huge dimensions in the American Midwest, whereas in todays
rural and poor countries you have farmers working very small plots. As the
populations move to urban areas. A number of those farms are going to become
much bigger more industrial type of farming less of the small holder farms and
the peasant farming that has characterized these countries till now. So this is, in
short, one of the big divisions within countries, the rural. Urban divide.

The process tends to be in one direction. The arrow is pretty strong from rural to
urban in the process of economic development. Along the way, societies are
divided. Cultures are divided. A lot of urbanization though is associated with
higher incomes, better public services. Better education, declining fertility rates,
and that is a pattern that we see in many parts of the low income and the middle
income regions of the world.

Income Inequality Within Countries

Were interested in economic development. We measure that in shorthand as
the gross domestic product per person. But weve noted that the variation in
incomes across households within a country across individuals within a country
can be very large. So we have to take into account not only the average level
income, but the inequality of income within a country. You all know the famous
quip of the man whose feet are on fire, whose head is on ice, and hes asked
hows the temperature? He says on average its fine. But of course its
devastating with the inequality of fire, and ice. And societies can be like that
also.

On average income can be just fine. But if income is just fine because a few
people are, fantastically rich, and the rest of the country is excruciatingly poor.
Its not so fine, after all. And so in addition to measuring, the average level of
development as the gross domestic product. Per person, we want to find ways
to measure the inequality of income within the country.
There are several indicators that are used. We can look at the ratio of incomes
of those at the top of the income distribution. To those at the bottom, sometimes
we look at the, income of the top 20% of the population compared to the
income average of those in the bottom 20% the poorest 20% of the
population. Another measure that is quite useful a little bit fancier. Is a measure
called the GINI coefficient, its a measure that varies between 0 and 1, 0
meaning complete equality, everybody has the same income and 1 is exactly
the case of one person in the country having everything.
You know the king, the potentate, he owns everything and everybody else is
completely impoverished. They have nothing. They would be a GINI coefficient
of one. Of course, real societies arent at 0 or 1, theyre somewhere in between.
Societies that we would regard as. Rather equal with the broad middle class. A
lot of countries in Scandinavia, for example, have a GINI coefficient around
0.25. Whereas countries that are much less equal. Where there really is a lot of
wealth at the top but then a lot of poverty alongside it, might have a GINI
coefficient not of one, the pure inequality, but a GINI coefficient around 0.5 or
0.6, and so thats the variation.

Its an extremely useful measure. We can put it on a map, and have a look at
where inequality tends to be high, and when inequality tends to be relatively
low. The lowest inequality tends to be in. Western Europe and especially in
Scandinavia I mentioned. Countries like Sweden, Norway, Denmark, tend to
have relatively equal income distribution, a broad middle class. Not so many
super rich and basically no super poor. And you see on the map the, the light
shading of those countries indicates a quite low GINI coefficient. Canada is
similar.

The United States, if you look at just south of Canada. Thats shaded in red.
The US is quite unequal in income distribution compared with Canada or
Western Europe, and especially compared with the countries in Scandinavia. In
the United States we have a lot of super-rich, more billionaires than in any other
part of the world, and we have a lot of very poor people, maybe not as
excruciatingly poor as one would find in the least developed countries, but
relative to the billionaires, poor people in the United States really dont have
very much at all. You can see looking at this map a very interesting
phenomenon that most of the Americas, with the exception of Canada. It is
shaded in red and quite unequal. The Americas as a whole, both North America
and South America are relatively unequal societies. Africa for the countries
where we have the data. Also, rather unequal and in comparison, for example,
with the India or other parts of South East Asia. Africa tends to rank relatively
high in inequality.

China was quite equal. In its poverty 50 years ago but with a lot of economic
development with a widening of the gap between those living in the urban areas
doing rather well and those living in the rural areas remaining still rather poor.
The inequalities in China have risen to levels similar to those of the United
States and that means on an International comparative bases, a relatively high
degree of inequality.

Now, its interesting to look in a little bit more refined way at this GINI coefficient
among the high income countries. Because it shows us that there are different
pathways to economic development. Getting richer doesnt mean necessarily
becoming more unequal, nor does it guarantee becoming less an inequality, or
more equal.
There are different pathways for development. Northern Europe has chosen a
pathway of becoming wealthier with a lot of social equality. Whereas the United
States has been on a path of rising incomes alongside rising inequality. If you
look at the Gini coefficient across the high income countries in this bar chart,
you see countries like Denmark and Norway, Sweden, with the lowest Gini
coefficients and it.

Those with the highest Gini coefficients it, countries eh, like the United
Kingdom, Israel, United States, Turkey, Mexico and Chile. Countries with big
gaps between the rich and the poor. How do we explain these gaps?

Well, this is a very complicated challenge and it is of course contentious issue,

as well. There are many reasons for inequality that we want to direct attention
to, to make sure that we dont treat such a complicated challenging device of
topic.

In a simplistic manner, because history plays a big role, geography plays a big
role. Government policy plays a big role. Let me mention a few of the causes of
inequality or reduced inequality across countries. Traditionally, the size of land
holdings made a big difference. Some countries especially in the Americas had
huge farms. Huge haciendas often taken by the European settlers who came to
the Americas, and they often displaced indigenous populations. They often
brought in slaves actually to work those large farms And so while there were
some with huge land holdings, there were others that were landless, or, so
displaced from the land. And in traditional societies were agricultures so
important, the size of land holdings is a crucially important dimension. Of
inequality. Variations in education levels are a very important source of
inequality. Those young people who are lucky enough by dent of their own hard
work or their familys support. Usually a combination of the two, to be able to get
higher education. That higher education will translate in the modern economy
into higher income levels as well. Whereas kids that are unlucky growing up in
very poor families, very poor communities and arent able to make it through to
higher levels of training. May get stuck with the very low income levels, so in,
their employment. So education, can become an equalizer if everybody has the
opportunity, but it can also become a source of inequality as well.

I mentioned earlier that the world urban divide is key. Families that move to
urban areas often find better employment prospects and higher incomes. Those
left in villages as small holder farmers often eek out survival in a lot of poverty.

Discrimination matters tremendously of course, still in this world. Women all

over the world are not given the same chance as men in the labor market. They
dont earn the same incomes, even when theyre doing the same job or better.
They face a discrimination that is deeply entrenched even though fortunately it
is, being reduced in, in many places. racial, minorities ethnic groups that are
minorities, the religious groups that are minorities often face terrible conditions
in the labor market. Not able to get education, not able to get the kind of
employment that they would deserve. If they were treated fairly.
Government policies make a huge difference. Corrupt governments that collect
big,rents on, oil holdings or diamond holdings or other mineral deposits in the
country and then use that income for a very small class of insiders. And maybe
for those in power, the royal family, the the politicians, the political class, can
create a huge amount of inequality. Often countries that live off of a few mining
resources, oil, gold, diamonds, are very unequal because of the ways that That,
that government revenue is allocated. At the same time, governments can be
great equalizers. If governments collect revenues and then ensure that the poor
can go to school, that poor people can get access to health care, that
everybody has a chance, that poor families are given some income support as
they are in Scandinavia. To ensure that their children will have a good chance,
then governments can narrow the income inequality as well.

Let me turn back to why the Americas are relatively unequal. Well, they were
settled by conquest. European settlers took the large landholdings. European
settlers brought in slaves. European settlers displaced. Indigenous populations.
Over time, those forces turned into different forces. The descendants of
Europeans today tend to have better educational opportunities. But, as
democracy has come to the Americas, theres also a very powerful trend Of
equalization taking place in at least some countries. More kids able to go to
school, governments leaning towards social inclusion rather than away from it
as was historically the case. In sustainable development, not only do we try to
understand inequality. But we hold it as one of the goals, that there should be
social inclusion in economic development, and yet at the same time the forces
of politics, the forces of market change, the forces of trade and globalization
often favor the rich who are able to use those forces to their advantage.

So that the rich tend to get rich and the poor even poorer. Thats our battle and
thats our challenge. Understand the inequalities of income within societies, find
ways as those impressive societies in Scandanavia have done to ensure. A big
middle class, and a chance even for a child born into a relatively poor family,
and that can become the path to social inclusion, one of the pillars of
sustainable development.

Measuring Wellbeing
Were interested in the quality of life. Part of that of course is the level of
income. Can people feed themselves? Can they afford healthcare? Can they
afford basic amenities? But we know that, theres more to life than bread alone.
We know that material possessions arent everything. We know that simple
measures, like the income per person, only give us a rough reflection of the
overall level of well-being of an individual or a nation. And since in sustainable
development what were really interested in, is not raising market income per
se, were really interested in raising human well-being.

Its important for us to ask then, how can we measure well-being? Ive used so
far the shorthand of the gross domestic product per person. Because its not a
terrible indicator. It gives us some relevant information. It is not only related to
income and not only related to the absence of poverty when that income per
person is high enough, but it also is related to other things that we know we
care about, education levels, health and opportunities in life. But of course, we
can do better than using one simple indicator of human well-being, and we
know that whatever indicator we use we cant just rely on averages.

We have to look at the variation within a society, or across societies, as well as

the average numbers that were using. So what are some of the options of
measuring human well-being that go beyond the simple calculation of the gross
domestic product per person? One important innovation championed by the
United Nations Development Program during the last quarter century is
the human development index.
It tries to give a more holistic account of human development to take into
account things which empower people. Which help them meet their capacities.
And it does that by looking at income per person as just one of the three
basic dimensions of well-being.
Adding in indicators of educational attainment, whether its literacy or
enrollment rates, together with measures of health typically looking at life
expectancy at birth. And by taking a kind of weighted average a part due to
income, a part due to education, and a part due to health, The United Nations
Development Program has created and now tracked for a quarter century an
overall index of human development, or HDI. And weve learned a lot from that.

If you look at the HDI, or the human development index you can see that it
looks similar to the map of gross domestic product per person. But, its by no
means the same. There are countries that are relatively low on income per
capita and do quite well on the human development index because they have
good indications of life expectancy and educational attainment.
There are, on the other hand, many countries that rank very high in income per
capita, but do not have good outcomes when it comes to health and education.
Lets take a look at some examples of countries that are rather rich in terms of
their gross domestic product per capita. But rather poor on their human
development indicators. Equatorial Guinea is such a case.

Equatorial Guinea was a completely impoverished country in West Africa until a

few years ago when it struck it rich with the oil and gas discoveries. Thats
potentially good if those oil and gas earnings are used wisely and invested in
raising overall well-being. But theres a lag and theres a question of the equality
of governance to accomplish that. As it stands today Equatorial Guinea ranks
rather high on income per person. Its 32nd in the world in income per person,
but it ranks 136th in the human development index meaning that its education
and health outcomes are still pretty miserable. It has not yet turned its oil and
gas earnings into real benefit broadly for the society.

Another example is similar, Angola. Angola is a country in Southwest Africa,

also a major hydrocarbons economy. Also with the opportunity to take those
earnings of oil and gas and convert them into broad based improvements of
living conditions. But, there has been a serious gap, and a lot of corruption
along the way. So that Angola ranks in the middle of the pack, 88th in the gross
domestic product per capita, but 148th in the human development index.

So you see that the human development index adds a lot of useful information
for us by giving us a broader based snapshot than taking the gross domestic
product per person alone. If you flip it around and ask about countries that are
ranking higher on their human development than on their income per capita, the
reverse of the phenomenon that we just saw an Equatorial Guinea and Angola.

You could look to a country like Sri Lanka which traditionally, even though its
had a lot of violence and upheaval, has had relatively high social indicators of
health and education even at a relatively low level of domestic product per
person. Another country quite developed at this point. A high level of gross
domestic product per person, but even a higher human development outcome is
South Korea.

South Korea is an amazing country. Its had a huge success in economic

growth, meaning that the GDP per person has soared over the last half century.
Its become one of the richest countries in the world. But part of that has been
an incredible focus on raising education standards and on the health of the
population. So that as high as South Korea now ranks in the GDP per capita,
roughly around 30th in the world, its ranking in human development is near the
top of the worlds charts roughly around the 12th position in HDI.
So this has been a quite useful expansion of our ability to assess and
categorize countries, because just as the World Bank categorizes countries as
high income, middle income and low income, the United Nations has
categorized countries as high human development, medium human
development, and low levels of human development.

But theres another absolutely fascinating way that we can attempt to assess
well-being. And you think about it for a moment you say, hey, why not? And that
is, ask people. Ask people about the quality of their lives. Are they satisfied with
their lives? How would they rate their lives in terms of a a, a ladder where the
top rung of that ladder would be full satisfaction, the bottom rung of the ladder is
feeling pretty glum.

And asking people where they stand on that ladder of life say between the
lowest rung of zero, and the highest rung at ten. In recent years there has been
a huge, absolutely fascinating effort to assess well-being in that straightforward
way. Asking people, are you happy in essence?

And its important to note that psychologists and, and scholars of happiness
have found two quite distinct dimensions of happiness and two quite different
kinds of questions to elicit that. One is to ask, emotionally, did you have a
good day yesterday? Were you happy? Positive emotions and thats sometimes
called emotional or affective happiness. And the other is to ask people a quite
different kind of question. How do you evaluate your life? Are you satisfied
with your life? Where would you put yourself on the ladder of life? Thats called
evaluative happiness. Youre evaluating life. And thats the kind that I think we
should look at to try to understand where countries and individuals feel they are
in the path of broader economic development.

We have a map. We can look at the distribution of reported happiness in that

evaluative sense, in the sense of life satisfaction around the world. One thing
you do notice, richer countries tend to be happier. But thats not all there is to
happiness. There are countries that are middle income countries close to the
top of the charts. There are richer countries at the top of the league in GDP per
capita but not so happy and we learn a lot from this.
Looking at this Im happy to say that the Americas, thats my part of the world,
thats a pretty happy part of the world. You can see it in, in the maps. Western
Europe Australia and New Zealand rank very high on happiness. Some of the
poorer regions perhaps not surprisingly rank much lower.

What do we learn when we study the differences of happiness in this evaluation

sense around the world? We find out that income per person, or GDP per
capita, matters but it doesnt matter all that much. We have to keep focused that
its just one aspect of happiness.

A second major reason for happiness or unhappiness is the quality of what we

call social capital, social connections. Do people have good networks of friends
and colleagues? Do they trust others in their community? Do they trust their
government to be honest or is their government corrupt? Thats a huge
determinant of whether people report their lives to be of high satisfaction or not.
Their own health, physical health and mental health, of course, plays a very
important role.

And what I find absolutely fascinating and important. A theme that I want us to
reflect on as we think about sustainable development is that an individuals
values, things that an individual holds to be important, are shown to be strongly
related whether that individual is happy or not. Interestingly, the people who
report a very strong fixation on getting rich, on very materialist values, turn out
to be a bit more frustrated. They dont report as much satisfaction in life. People
who report that generosity is very important to them, volunteering, giving, a
sense of altruism, contributing to the community are also values that are shown
repeatedly in many studies to be related to a higher level of life satisfaction.

This is quite important for us as we think about sustainable development. If we

simply pursue income per capita. Just raise that gross domestic product per
capita no matter what. Were going to lose it on many counts. Societies will
become highly unequal. The physical environmental will come under great
threat. But also people will not necessarily achieve the kind of happiness and
life satisfaction that they want.

If we take a more balanced and holistic approach as sustainable development

bids us to do. Paying attention to higher income per person, but also focusing
on healthy societies, social inclusion, honest government, networks of social
support. And if we promote values of generosity, of compassion, of voluntarism
rather than values of strong materialism, of just trying to get rich, that also can
help people to become happy.

In the end, our goal is satisfaction with life. It is human well-being. We need to
take a rich and varied perspective. Fortunately we have more and more tools to
be able to measure, assess and ultimately to help to promote improvements of
human well-being in this deeper and more inclusive sense.

Convergence or Divergence?
Weve been looking at the level of economic development across countries in
the world, weve been using the short hand of the gross domestic product per
capita. One of the most important questions we want to know is whether todays
poor countries have the chance, and are indeed on a path to close the gap with
the higher income countries.

We know that if they make that transition successfully It will raise their well
being but it will also improve other aspects of life. The health, the life
expectancy of the population, educational attainment, opportunities of the
population more generally. Were interested therefore both in understanding
whether poor countries tend to narrow. The development gap with richer
countries. And from that normative or goal directed perspective were interested
in how that can be achieved.

Economists use a couple of terms that are very important for this concept. The
term convergence Is the term that is used to convey a narrowing of the
proportionate gap of a poor country and a, a richer comparison country. Is the
proportion of income per person in the poor country relative to the rich country
Rising. Is the poor country closing that gap? If so, the poor country is said to be
converging with the higher income country. The opposite is divergence.
Divergence means that the poor country, in relative terms, is becoming even
Poorer when compared to the rich country. Maybe the poorer country is making
progress, maybe its income per person is rising 1% per year. But if the richer
country is making even faster economic growth, say 2% per year. Then the
poorer country will have a declining relative size in gross domestic product per
person relative to the higher income country.
So we want to study whether countries are converging or diverging. That will tell
us a lot about, whether overall differences of material life, life expectancy,
health, education levels, degree of urbanization, are tending to narrow between
the rich and the poor countries, or tending to widen. I would say in this very
complicated question with a very diverse record of now the 193 countries
around the world.
So no one story line that fits all. We could say in broad terms that one part of
the period of modern economic growth has. Tended to be characterized by a
kind of divergence. And more recently, by a pattern of broad convergence.

What do I mean by that? Were going to be studying how modern economic

growth took off in the industrial revolution. And we know that until the Industrial
Revolution began, most of the world was poor. Most of the world was rural. The
gaps of, rich and poor countries were quite narrow, not like the huge gaps
today. And then, a takeoff started with the Industrial Revolution. And with that
take-off a certain part of the world a relatively small part of the world starting in
England spreading to Great Britain more generally spreading to Western
Europe the United States, Australia a very few other places initially experienced
that industrialization.
In the first part of the 19th Century. Most of the rest of the world remained poor
and rural, and the overall process was one of divergence. The rich were
becoming richer because they were industrializing; the poor were like they
always were. Eking out survival in peasant farming in most of the world.
Relatively untouched by the new inventions of the steam engine, or the railroad,
or the telegraph, or the other technological advances that helped to set off the
process of long term economic growth.

One could say that the rich were getting richer. And the poor were kind of stuck
at the bottom. And the relative gap between the two was tending to widen. Then
came a huge political phenomenon. And that is the phenomenon of imperialism.
Because as Western Europe became industrial and quite powerful, it took
political control over more and more of the world. Will see that the British empire
expand the world will see that other European powers. Took on more and more
imperial possessions, notably in Africa and in Asia. This, I think, was a big set-
back to the potential of convergens. Because, when countries are dominated by
other countries, its very hard for those who are in that subservient position
politically to undertake the kinds of steps improving the infrastructure of the
country raising education levels that are crucial for achieving economic
development, and often the imperial masters. Are not so interested in the
economic development of their possesions, rather theyre interested in taking
out as many of the resources of those countries as they can, for the
development of their own home industries.

I think its fair to say, from the period of around 1850 to 1950 The world was
broadly characterized by economic divergance, where a few parts of the world
were becoming richer and richer, more and more industrialized, more and more
millitarily powerful, other parts of the world were stuck in poverty and Many
parts of the world were stuck as the imperial possessions, of, European imperial
powers.

Of course, there was much history during that century and two devastating
world wars. And at the end of the second world war, A quite different political
dynamic, one very important for global economic development occurred, and
that was the so-called end of the colonial era, and the decolonization of
countries around the world who gained political independence. One of the bright
spots of a political sovereignty, freedom from imperial domination was the ability
of more and more countries to undertake economic development on their own.
And many countries, when they got independence, said hey were far behind;
now its our turn to industrialize We need to take crucial steps. Build roads, build
rail. electrify, the countries, so that electrification provides a basis for industrial
development. Attract industry. Both the domestic and foreign investors. So that
we, too, can experience the process of economic development. And with that
massive global political change, and with further technological developments,
better transport, better communications, the new information age, that enabled.
The poor countries of the world to pick up the pace of their economic
development. And convergence that is faster economic growth in the poor
countries became more of the usual condition that it had been in the years up to
1950.

Since the middle of the last century, therefore, the end of World War II, the end
of the Imperial Age, the beginning of the economic development in many former
colonies, weve seen a tendency towards conversions. And that is enabling
more and more Low income countries to join the ranks of the middle income
countries, and middle income countries to join the ranks of the high income
countries.

One of the crucial goals of sustainable development is that all of todays low
income countries and especially the least developed countries remember the.
50 or so poorest and most vulnerable among the low income countries, should
make that transition successfully through convergence to middle income status.
And most of them, or perhaps all, have the goal of achieving high income status
through their own economic development. One of our key goals is to
understand how that process can work and what is it that impedes convergence
among some countries.
When we look around the world today we see ample evidence of countries that
were once poor achieving very rapid. A convergence. China is our most
exemplary case. Astounding economic performance over roughly 35 years
since 1978 when China began many important economic reforms that put it on
a path of convergent growth. We also see parts of the world, todays least
developed countries, stuck in poverty, well call that a poverty trap that is so
tight, that they are not yet achieving economic conversions. Niger is an example
of such a country. It is a land locked country in the Sahel region of Africa. You
can see it on the map that it is a country just south of the Sahara Desert. Its far
from the coast. Its one of the worlds poorest countries. Its a country thats just
at the bottom of the worlds human development index, meaning that not only is
it income poor but also its conditions of education and health, are very dire
indeed. But not only has Niger had to suffer this kind of poverty Its been stuck
in a poverty trap for a long period. So unlike China, it has not been achieving
economic conversions. Lets look at at the numbers just as an example. Well
measure the gross domestic product Per person, in purchasing power parody
adjusted terms. Remember, taking into account different price levels across
countries. If we look back at 1980, the per capita income in the prices of those
days, in the United States was about $12,000 per person. In China about $250
per person, very poor. In the Niger, maybe even higher than China on the,
official date at about $450 per person. Now lets fast forward to the year 2010.
Whats happened? China experienced decade after decade. Of double digit
economic growth with the economy doubling every few years, every seven
years on average. And that meant that by the time 2010 came around China
was no longer at $250 per person. It was now at merely. $10,000 per person the
United States by then at about $50,000 per person Niger unfortunately still
stuck at below $1,000 per person and still among the least developed countries.
If you ask the question about. Divergence and convergence China, went from
being 2% of the U.S,. gross domestic product per person to being around, 20%
of the us gross domestic product per person. Still. Far below the US income
level, even adjusting for price level, but narrowing the gap very quickly. Niger
sadly, started out at around 4% of the US per capita level, but by 2010, less
than 2%. In other words, experiencing divergence rather than convergence.

One of our most important objectives in the coming talks will be to examine this
process of convergence versus divergence to try to understand the underlying
factor. And really to unlock the keys that can help todays poorest countries get
on a trajectory of convergence so that they too can have the improvements of
material life, improvements of health, education, income per person that we
know can be important component of improved well being.