As many across the world entered the New Year in a celebratory mood, others are still struggling to recover from the effect of the recent economic downturn. Five years ago began the worst economic recession the world has experienced in generations. With life support by Governments and Central Banks, the global economy seems to have stabilized, but the ‘patient’ is still weak. In 2013, the global economy is estimated to have expanded at a modest 2.2 percent rate (despite a contraction in the Euro zone) and for 2014 the World Bank and IMF project a slight uptick to 3.0 percent.
But what do these numbers actually tell us about the well-being of people? Does economic growth capture what really makes a difference in peoples’ lives?
Gross Domestic Product (GDP) is the standard measure of economic activity and it captures the rate at which economies expand (or contract) from one period to the next. Total GDP for each country is also equivalent to the totality of each person’s income (which reflects the goods and services they produce). Although commonly used the measure is clearly not flawless: for instance the ‘services’ that mothers provide by educating their children (nurturing future economic agents) are not reflected in GDP, while a car accident and resulting repairs would count positively. Still, GDP growth on average is necessary for development and good for the poor and there is also some evidence that economic prosperity – all other things equal – makes people happier.
However, obviously, GDP growth can only bring about improvements in living conditions if it outpaces population expansion. Indeed, if a country’s economy grows at 3 percent and the population growth rate is also 3 percent, then no one is better off, on average, as a result. However, if the population grows at 1 percent only, then per capita growth is 2 percent. Since population growth rates differ across countries and regions in the world, a GDP growth of 5 percent in Sub-Saharan Africa has the same effect per capita effect as 3 percent growth in Europe; this is because population growth is 2.5 percent in the former while only 0.5 percent in the latter.
For this blog, we reviewed global GDP growth since 2000 and looked specifically at the ‘net’ effect, once the countervailing force of demography is factored in. At the global level, growth was 2.6 percent since 2000 despite the 2008/09 crisis and subsequent Euro-crisis; however, average incomes only registered a modest 1.4 percent increase as 1.2 percent was “eaten away” by a rising population.
The good news is that the world’s poorest regions have also grown more strongly both in terms of overall and per capita GDP and there are three broad groups of countries:
- The first group includes South and East Asia which have witnessed a dramatic per capita growth of 7.2 percent. In other words average incomes have more than doubled in Asia since 2000. East Asia is doing particularly well (8.4% vs. 5.6% for South Asia) in part thanks to a low “population discount” of less than 1 percent;
- High-income countries (predominantly USA, EU and Japan) have performed the weakest, with 1.1 percent annual per capita growth on average;
- In the rest of the world (Africa, Eastern Europe and Central Asia, the Middle East, and Latin America) individuals have seen their incomes grow between 2.2 and 4.2 percent each year. Africa and the Middle East grew at a robust 5 percent rate but with a high “population discount”. By contrast, Eastern Europe and Central Asia experienced the highest per-capita growth but largely thanks to slow population change.
By 2020, when the world will reach 7.6 billion, population growth will have fallen below 1 percent for the first time in 200 years. If the world can achieve economic growth of 3.5 percent (thanks to a larger share of working adults), per capita incomes will rise by a substantial 2.5 percent, a level only exceeded once between 1945-1973 when average incomes rose by 3 percent per year. Africa, however, will need much more in order to sharply reduce poverty, while Europe can continue to cruise at a low 1-2 percent and still enhance the welfare of its citizens.
Money alone doesn’t bring happiness but none of it brings misery, especially for the poor. So let us also work in 2014 to grow the incomes of poorest countries and people.