What Thomas Friedman and Niall Ferguson don't understand about the rest of the world

Big growth in the developing world is not a threat. It's time to talk about the advantages of a multipolar world

Published January 12, 2014 4:00PM (EST)

Thomas Friedman           (Reuters/Woody Wu)
Thomas Friedman (Reuters/Woody Wu)

Excerpted with permission from "The Upside of Down: Why the Rise of the Rest Is Good for the West"

The historian Robert Kagan has complained that pundits recently went from America boosting to America bashing in awfully short order. In 2004, he notes, Fareed Zakaria was arguing that the United States enjoyed a “comprehensive unipolarity,” and yet only four years later the Newsweek editor and CNN host was talking about the “post-American world.”

But it isn’t just the chattering classes. According to Pew survey evidence across fourteen nations, the percentage of respondents who said that the United States was the leading power in 2010 was still 40 percent—compared to 36 percent who said China. In 2012, China led the United States 42 percent to 36 percent. And while the Chinese themselves don’t believe it, American respondents are even more convinced than the global average that their days at the top are over.

As a result, self-flagellation is in the air in America. More specifically, the flagellation of Washington is in the air. Why is the country on the skids, falling behind, destined to be a second-rate power? Blame Congress. And the president. And (always) the East Coast Media Elite.

Talking of whom, take the 2011 tome by Thomas Friedman and Michael Mandelbaum, That Used to Be Us. The subtitle is How America Fell Behind in the World It Invented, and How We Can Come Back. They advocate entitlement reform, alternative energy investments, and faster subway escalator repair as key to America’s renaissance. Meanwhile, Niall Ferguson argues in his book Civilization that the West led over the Rest because of six “killer apps”—competition, science, property, medicine, consumption, and work. The Rest has now downloaded these apps, suggests Ferguson, but if the United States reboots the software, it can upgrade its civilization. Not that it has been doing too well at that, he thinks: under President Obama, America is “a superpower in retreat, if not retirement.”

To which the answer is: well, sort of. Surely Washington could do a lot better at running the country. Not least, as Ferguson suggests, it could do something about special interest lobbying, and a (still) dysfunctional health care system. And as Friedman and Mandelbaum make clear, more infrastructure and education investment alongside stricter energy standards would surely help. But the idea that if only Washington started to act, well, more Washingtonian the United States could remain top nation is still silly. Indeed, Ferguson at times admits that “the Chinese Century” is somewhat of a foregone conclusion. Whatever we do to improve the functioning of the US economy, the idea that we can outrun China or India for long is just wishful thinking.

The relative economic decline of the United States is not about gridlock in Washington, stupidity or venality on Wall Street, the lack of can-do spirit among the young, or even the death of “the Greatest Generation.” It is about the rest of the world finally getting its act together. That’s not to say that America is doing everything right, of course; much of the rest of this book is about what the country could do better to engage with a new world of opportunity. But it is important to recognize that policies to “regain US dominance” are destined to fail—and are likely to be counterproductive.

* * *

For most of the last two hundred years, the story of global incomes has been one of the rich getting richer and the poor staying poor—or “divergence, big time,” as Harvard’s Lant Pritchett puts it. In 1870 the world’s richest country was probably about nine times as rich as the poorest country. By 1990 that gap had increased to a forty-five-fold difference. And populations had grown fast in many of the stagnant economies at the wrong end of this divergence. As a result, the number of the “absolute poor” worldwide—those living on $1.25 a day or less—had climbed dramatically. In 1981, 1.9 billion people, or half of the population of the developing world, lived in absolute poverty, according to Shaohua Chen and Martin Ravallion of the World Bank. At this level of destitution, obtaining adequate nutrition just to survive would take up the great majority of a person’s resources—leaving precious little for shelter, medical care, or anything else.

But since then, the pattern has reversed. In the 1980s, the average GDP per capita growth rate in developing countries was 1.4 percent, according to data from the World Bank. In the 1990s, that climbed to 1.8 percent. In the first decade of the new century, the number shot up to 4.4 percent—considerably higher than growth rates in rich countries. As a result, a lot of countries formerly known as “developing” are looking considerably better off nowadays. Few would argue that Italy and Austria were not “developed” economies in 1960. And yet average incomes not just in China but in Mexico, Thailand, Russia, Malaysia, and Argentina (among others) are considerably higher today than they were in Italy or Austria in 1960.

Meanwhile, incomes per head in the United States, the United Kingdom, Germany, and Japan increased by around 1 percent a year over the past decade. The US economy expanded in size by 18 percent from 2000 to 2010, ahead of the United Kingdom (15 percent) and Germany and Japan (less than 10 percent). In a ranking of the 164 countries for which the World Bank has data on GDP growth over the decade, the United States came in 134th, with the United Kingdom, Germany, and Japan in 140th, 154th, and 155th place. At the same time, the top nineteen countries in the world in growth over the decade—all of which were developing countries—saw their GDPs more than double over the ten years from 2000 to 2010. And that top nineteen included some really big countries—not least India and China—so nearly 2.6 billion people benefited from all of that economic dynamism.

But this isn’t just a story of leaping Chinese tigers and waking Indian elephants—even Africa, traditionally written off as a hopeless economic backwater, has joined in the progress. That continent has been growing like gangbusters, though you probably haven’t noticed, because the forty-nine African countries still have a combined economy smaller than Texas at market exchange rates. The club of economies that doubled in size included no fewer than eight from Africa south of the Sahara. Indeed, sub-Saharan Africa took seventeen out of the top forty spots in the decade’s global GDP growth rankings. Although populations have expanded since 2000—by around 28 percent—the fact that the region’s GDP is now 66 percent larger than it was in 2000 still suggests that the average income in the region is about one-third higher than it was ten years ago.

In turn, we have seen a dramatic fall in the number of the world’s absolutely destitute. From 1.9 billion people in 1981, the number of people living on $1.25 a day or less worldwide fell to around 1.3 billion in 2005, according to estimates from Laurence Chandy and Geoffrey Gertz of the Brookings Institution. And they suggest that the number was below 900 million in 2010. They estimate that the proportion of people living in absolute poverty has shrunk from one-half of the developing world in 1981 to less than one-sixth today.

* * *

The real question for the relative standing of the West and the Rest, and for the absolute quality of life of people worldwide, is this: will the countries of the developing world continue to follow the pattern of the last fifteen years, or will they revert to the long-term pattern of stagnation? After all, even though the rapid growth of newly independent developing countries in the 1960s set them on a convergence course with incomes in the rich world of the era, this growth petered out soon thereafter. Nothing is preordained.

Part of the answer to this question depends on what underlies the wealth of nations. First, is it people, or is it place? Are certain parts of humanity just incapable of generating wealth, or is it something in the nature of the societies they live in—or the geography of their surroundings—that keeps them poor? And if it is about place rather than people, is it a feature that is easy to change or one that has persisted over centuries, dooming some countries to perpetual economic disappointment?

The debate about people over place is one that richer people have about poorer people across town and across the planet: Why are they poor? Is it circumstances, or is it some kind of moral or intellectual failing on the part of individuals? Is it that poor people never had a chance to cross from the wrong to the right side of the tracks, or that they never had the motivation to cross? Some believe that the poor in America would be better off if only they weren’t so lackadaisical about work, or if only they weren’t so congenitally stupid. This view colors their thinking about international development as well. But in fact, poverty in Africa and Asia isn’t the result of something about individual Kenyans and Pakistanis, it is instead something about Kenya and Pakistan. Individuals the world over have the same drives and capacities, but the societies and places in which they live present radically different opportunities to turn that drive into wealth, health, and well-being.

That’s clear from evidence compiled by Princeton economist Orley Ashenfelter for the National Bureau of Economic Research. He looks at the wages earned by staff working at McDonald’s franchises around the world and compares what they earn to the cost of a Big Mac in that same franchise. The Big Mac is a standard product, and the way it is made worldwide is highly standardized. The skill level involved in making it (such as it is) is the same everywhere. And yet McDonald’s employees worldwide earn dramatically different amounts in terms of Big Macs per hour.

In the United States, a McDonald’s employee earns an average of $7.22 an hour, and a Big Mac costs an average of $3.04. So the employee earns 2.4 Big Macs per hour. In India, an employee earns $.46 an hour. The average Indian Big Mac (made of chicken, which is cheaper than beef) costs only $1.29. Still, the employee earns only one-third of a Big Mac for each hour worked. Same job, same skills—and yet Indian workers at McDonald’s earn one-seventh the real hourly wage of a US employee. There’s a huge “place premium” to working in the United States rather than India.

The place premium affects more than just low-end service jobs. Economist Michael Clemens, a colleague of mine at the Center for Global Development, studied a group of Indians working in an India-based international software firm who applied for a temporary work visa to the United States to do the same work in the same firm, just on the other side of the Pacific Ocean. Some of them then won the lottery by which visas were issued, while others lost. The winning workers, who were still in the same firm and still doing the same type of job on the same projects, suddenly saw dramatic differences in their pay.

The ones who moved to the United States started earning double what their colleagues back in India were earning (adjusted for purchasing power). They were earning more not because they were different from the colleagues they left behind—selection was not based on education, talent, or drive but was entirely random. And once they returned to India, they went back to earning pretty much the same as their colleagues who had never left. They briefly earned more in the United States simply because they were in the United States rather than India. Clemens concludes that location alone—the place premium—accounts for three-quarters of the difference in average pay levels between software workers in the United States and their counterparts in India. That leaves different production technology and levels of effort accounting for a maximum of one-quarter of the wage difference altogether.

So the overwhelming explanation for who is rich and who is poor on a global scale isn’t about who you are, but where you are. And why do very similar people in the United States earn so much more doing the exact same jobs as people in India? The answer lies in infrastructure—physical infrastructure like (comparatively) good road and electricity networks alongside economic infrastructure, including a (somewhat) robust banking system—and institutions, such as a (passable) set of commercial laws and (not completely capricious) regulatory regimes. The higher quality of these public goods allows the same amount of effort by the same-quality employee to create considerably more value in the United States than in India.

But when we move from the question of people or place to the question “Why does the United States have superior institutions?” or “Are those features of place easy to change?” we see that many of the foremost thinkers in the field of development economics are busy digging through the history books—and suggesting that institutions are very deep-rooted indeed. More than a decade ago, MIT’s Daron Acemoglu and Simon Johnson, authors of the economics blockbuster Why Nations Fail, published a paper with another colleague, James Robinson, showing that areas where colonists lived long and healthy lives in the nineteenth century (think North America and Australia) went on to become rich countries at the close of the twentieth century. Meanwhile, areas like Africa and the Caribbean where early colonists died in large numbers, succumbing to tropical diseases like malaria and yellow fever, are today far poorer countries.

The reason, argue Acemoglu and Johnson, is that where only a small elite of colonists survived disease, societies were very unequal and colonial authorities had little incentive—or even had a positive disincentive—to provide public services like health and education to the mass of the population. Conversely, in areas that colonists could stay healthy in and occupy en masse (often wiping out local peoples in the process), the societies that developed were far more equal.

Acemoglu, Johnson, and Robinson’s work set off a race to dig further into the past to uncover statistical associations between historical characteristics and modern income. By 2006, we’d gone back three millennia. When New York University’s Bill Easterly and his colleagues asked, “Was the Wealth of Nations Determined in 1000 BC?,” they discovered that areas with technologies like writing, pottery, forging, wheeled vehicles, agriculture, and iron weapons back then developed into richer countries three thousand years later.

This makes for grim reading, at least at first glance. It suggests that who is rich and who is poor is determined by centuries or millennia of history, which in turn is related to which countries developed strong institutions of government to provide quality public services and which countries did not. This is a very long process. The corollary idea is that places that are poor today are likely to remain poor for a long time. Perhaps the recent good news out of Asia, Africa, and the rest of the developing world is just a temporary aberration. Just as strong growth in the 1960s petered out into sputtering performance in the 1970s and ’80s, perhaps the next twenty years will see renewed stagnation in the global South.

The depressing nature of the deep-institutions-as-destiny theory of the wealth and poverty of nations lies behind perhaps the most audacious—if failed—development experiment of the recent past: the Honduran government’s decision to set up a “charter city” on the country’s eastern coast. The brainchild of New York University economist Paul Romer, the charter city would have had considerable independence from Honduras’s own institutions of government. It would have been overseen by an international body of eminent economists and development practitioners, with a judicial system topped by the Mauritius High Court half a world away and constitutional protection from interference from Honduras’s parliament. The country’s own Supreme Court blocked the idea, and Romer has withdrawn from the project. But the concept was that if institutions are the secret to success, and Honduras’s institutions don’t work now and are unlikely to work for a long time, the solution is to carve out a bit of the country and import some working institutions from elsewhere to operate it. Think of it as a Hong Kong for the twenty-first century.

Luckily for Hondurans denied their charter city—and more broadly for the developing world as a whole—there’s a more optimistic way to read the record of economic history. While where you are is a powerful predictor of your relative wealth, health, and education, when you are is at least as powerful a predictor of your absolute wealth, health, and education. And that suggests the potential for widespread—and continued—progress in incomes and quality of life worldwide.

Thirty years ago, Richard Easterlin gave a presidential address to the Economic History Association asking, “Why Isn’t the Whole World Developed?,” which made the case for this more optimistic version of future history. His answer to the question was that economic growth is the result of the spread of knowledge about how to use production technologies, from the steam engine to the assembly line. And fundamental to the wide spread of that knowledge is broad-based education. The richest countries in the modern world were those where basic education had become widespread earliest, but poor countries would catch up, he noted, as education spread.

To some extent, Easterlin’s analysis jibes with the more recent work of scholars from Acemoglu to Easterly. After all, those countries where education was close to universal in the nineteenth century are also countries that had happier colonial histories or that discovered the compass earlier. But the conclusion that Easterlin drew for the future of poor countries was far more positive. He noted that education was rapidly spreading across the developing world and that this spread had been accompanied by “the diffusion of modern economic growth.” He predicted that, as countries completed a “demographic transition” to low birthrates and long lives toward the end of the twentieth century, “their long-term growth rates will be at least as high as those that the developed countries have so far experienced.”

The economic historian was right about trends in health and education. Life expectancies have climbed thirty years in China since 1960 and twenty-three years in India, according to World Bank data. And rates of enrollment in secondary education have gone from 37 to 60 percent in India and from 38 to 80 percent in China over the two decades since 1990. Pretty much everywhere else in the developing world has followed suit. In 1990 nearly 12 million children worldwide died before they reached their fifth birthday. By 2010 that figure was below 8 million.

And of all the people in human history who ever reached the age of sixty-five, half are alive now, reflecting considerably improved global trends in adult health as well. Again, contemporary populations of countries such as Haiti, Zambia, and Bangladesh have spent more time in school on average than the populations of France, Germany, and Spain as recently as 1970.

Still, Easterlin’s forecast had a rough couple of decades. In the twenty years after his 1981 lecture, developing countries continued to improve health and education access, yet growth rates declined across Africa and Latin America, significantly lagging behind the West. The cross-country link between education and economic performance appeared so weak that the Harvard economist Lant Pritchett wrote a much-cited paper asking “Where Has All the Education Gone?”

But we have seen that as the last century drew to a close, growth rates in the developing world did finally pick up, as Easterlin had suggested they would. And perhaps that growth really is linked to improved institutions and public services. Because even a lot of countries that saw high mortality among colonists or that lacked wheeled vehicles in 1000 BC are providing some government services today, not just education (even in sub-Saharan Africa, more than three-quarters of primary-age children are enrolled in school) but also health care; four-fifths of all children even in low-income countries (those with a GDP per capita of around $1,000 or less) are vaccinated against measles, for example. That’s one reason why today’s life expectancy in the former British colony of Ghana is about twenty-three years higher than in imperial Britain itself back in 1850. And even basic democratic rights have spread—long-term measures of levels of democracy kept by George Mason University suggest that the world has never been as democratic as it is today.

Of course, governments across the developing world could still do a lot better in providing the services that may underpin economic advance. Take education: the vast majority of kids worldwide may graduate from primary school, but all too many leave knowing not too much more than they did when they arrived.

More than one-third of African children who complete their primary education haven’t mastered basic literacy or numeracy by the time they leave.In health care services, survey evidence from India suggests that the average number of questions asked in an appointment with a government doctor in the country is one, which amounts to “What’s wrong with you?”

Again, when it comes to the rule of law, it’s hardly reassuring that about half of the people surveyed by Transparency International in sub-Saharan Africa report having paid a bribe to a government official sometime over the previous twelve months.

But the fact remains: the average developing country sees a quality and reach of government services that would have astounded the citizens of many rich countries only a century ago—long after Western economies had started their sustained progress toward high wealth. If the quality of government institutions really is the secret to future riches, the global economy— and in particular the world’s poorest people—could be in for a great few decades.

Perhaps as a result, even proponents of deep-rooted determinants of development are getting more optimistic about global convergence. For example, Enrico Spolaore and Romain Wacziarg of the National Bureau of Economic Research suggest that “genetic distance”—a measure of when two populations share common ancestors—predicts present-day economic outcomes. The smaller the genetic distance between two populations, the more similar their modern incomes. Spolaore and Wacziarg suggest that this happens because genetically closer populations also share similar cultural values, which in turn are linked to the quality of institutions and the ease with which new approaches and technologies can be adopted across borders. At the same time, Spolaore and Wacziarg note that culture is less of a barrier to development than it used to be. They suggest that genetic proximity has around half of the influence on income differences today as it did in 1870, now accounting for only about one-third of cross-country income differences.

Going forward, that proportion may well drop further thanks to the globalization of ideas, convergence in norms, and spreading education.

Excerpted with permission from "The Upside of Down: Why the Rise of the Rest Is Good for the West," by Charles Kenny.  Available from Basic Books, a member of The Perseus Books Group.  Copyright © 2014.

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