In order to take into account the differential prices of non-traded goods and services across countries, economists have come up with the idea of an ‘international dollar’. Based on the notion of purchasing power parity (PPP) – that is, measuring the value of a currency according to how much of a common consumption basket it can buy in different countries – this fictitious currency allows us to convert incomes of different countries into a common measure of living standards.
The result of converting the incomes of different countries into the international dollar is that the incomes of rich countries tend to become lower than their incomes at market exchange rates, while those of poor countries tend to become higher. This is because a lot of what we consume is services, which are much more expensive in the rich countries. In some cases, the difference between market exchange rate income and PPP income is not great. According to the World Bank data, the market exchange rate income of the US was $46,040 in 2007, while its PPP income was more or less the same at $45,850. In the case of Germany, the difference between the two was greater, at $38,860 vs. $33,820 (a 15 per cent difference, so to speak, although we cannot really compare the two numbers this directly). In the case of Denmark, the difference was nearly 50 per cent ($54,910 vs. $36,740). In contrast, China’s 2007 income more than doubles from $2,360 to $5,370 and India’s by nearly three times from $950 to $2,740, when calculated in PPP terms.
Now, the calculation of each currency’s exchange rate with the (fictitious) international dollar is not a straightforward affair, not least because we have to assume that all countries consume the same basket of goods and services, which is patently not the case. This makes the PPP incomes extremely sensitive to the methodologies and the data used. For example, when the World Bank changed its method of estimating PPP incomes in 2007, China’s PPP income per capita fell by 44 per cent (from $7,740 to $5,370), while Singapore’s rose by 53 per cent (from $31,710 to $48,520) overnight.
Despite these limits, a country’s income in international dollars probably gives us a better idea of its living standard than does its dollar income at the market exchange rate. And if we calculate incomes of different countries in international dollars, the US (almost) comes back to the top of the world. It depends on the estimate, but Luxemburg is the only country that has a higher PPP income per capita than that of the US in all estimates. So, as long as we set aside the tiny city-state of Luxemburg, with less than half a million people, the average US citizen can buy the largest amount of goods and services in the world with her income.
Does this allow us to say that the US has the highest living standard in the world? Perhaps. But there are quite a few things we have to consider before we jump to that conclusion.
. . . or do they?
To begin with, having a higher average income than other countries does not necessarily mean that all US citizens live better than their foreign counterparts. Whether this is the case depends on the distribution of income. Of course, in no country does the average income give the right picture of how people live, but in a country with higher inequality it is likely to be particularly misleading. Given that the US has by far the most unequal distribution of income among the rich countries, we can safely guess that the US per capita income overstates the actual living standards of more of its citizens than in other countries. And this conjecture is indirectly supported by other indicators of living standards. For example, despite having the highest average PPP income, the US ranks only around thirtieth in the world in health statistics such as life expectancy and infant mortality (OK, the inefficiency of the US healthcare system contributes to it, but let’s not get into that). The much higher crime rate than in Europe or Japan – in per capita terms, the US has eight times more people in prison than Europe and twelve times more than Japan – shows that there is a far bigger underclass in the US.
Second, the very fact that its PPP income is more or less the same as its market exchange rate income is proof that the higher average living standard in the US is built on the poverty of many. What do I mean by this? As I have pointed out earlier, it is normal for a rich country’s PPP income to be lower, sometimes significantly, than its market exchange rate income, because it has expensive service workers. However, this does not happen to the US, because, unlike other rich countries, it has cheap service workers. To begin with, there is a large inflow of low-wage immigrants from poor countries, many of them illegal, which makes them even cheaper. Moreover, even the native workers have much weaker fallback positions in the US than in European countries of comparable income level. Because they have much less job security and weaker welfare supports, US workers, especially the non-unionized ones in the service industries, work for lower wages and under inferior conditions than do their European counterparts. This is why things like taxi rides and meals at restaurants are so much cheaper in the US than in other rich countries. This is great when you are the customer, but not if you are the taxi driver or the waitress. In other words, the higher purchasing power of average US income is bought at the price of lower income and inferior working conditions for many US citizens.
Last but not least, in comparing living standards across countries, we should not ignore the differences in working hours. Even if someone is earning 50 per cent more money than I earn, you wouldn’t say that he has a higher living standard than I do, if that person has to work double the number of hours that I do. The same applies to the US. The Americans, befitting their reputation for workaholism, work longer hours than the citizens of any other country that has a per capita income of more than $30,000 at market exchange rate in 2007 (Greece being the poorest of the lot, at just under $30,000 per capita income). Americans work 10 per cent longer than most Europeans and around 30 per cent longer than the Dutch and the Norwegians. According to a calculation by the Icelandic economist Thorvaldur Gylfason, in terms of income (in PPP terms) per hour worked in 2005, the US ranked only eighth – after Luxemburg, Norway, France (yes, France, that nation of loungers), Ireland, Belgium, Austria, and the Netherlands – and was very closely followed by Germany.1 In other words, per unit of effort, the Americans are not getting as high a living standard as their counterparts in competitor nations. They make up for this lower productivity through much longer hours.
Now, it is perfectly reasonable for someone to argue that she wants to work longer hours if that is necessary to have a higher income – she would rather have another TV than one more week of holiday. And who am I, or anyone else, to say that the person got her priority wrong?
However, it is still legitimate to ask whether people who work longer hours even at very high levels of income are doing the right thing. Most people would agree that, at a low level of income, an increase in income is likely to improve your quality of life, even if it means longer working hours. At this level, even if you have to work longer in your factory, higher income is likely to bring a higher overall quality of life, by improving your health (through better food, heating, hygiene and healthcare) and by reducing the physical demands of household work (through more household appliances, piped water, gas and electricity – see Thing 4). However, above a certain level of income, the relative value of material consumption vis-à-vis leisure time is diminished, so earning a higher income at the cost of working longer hours may reduce the quality of your life.
More importantly, the fact that the citizens of a country work longer than others in comparable countries does not necessarily mean that they like working longer hours. They may be compelled to work long hours, even if they actually want to take longer holidays. As I pointed out above, how long a person works is affected not only by his own preference regarding work – leisure balance but also by things such as welfare provision, protection of worker rights and union power. Individuals have to take these things as given, but nations have a choice over them. They can rewrite the labour laws, beef up the welfare state and effect other policy changes to make it less necessary for individuals to work long hours.
Much of
the support for the American model has been based on the ‘fact’ that the US has the highest living standard in the world. While there is no question that the US has one of the highest living standards in the world, its alleged superiority looks much weaker once we have a broader conception of living standards than what the average income of a country will buy. Higher inequality in the US means that its average income is less indicative of the living standards of its citizens than in other countries. This is reflected in indicators such as health and crime, where the US performs much worse than comparable countries. The higher purchasing power of US citizens (compared to the citizens of other rich countries) is owed in large part to the poverty and insecurity of many of their fellow citizens, especially in service industries. The Americans also work considerably longer than their counterparts in competitor nations. Per hour worked, US income is lower than that of several European countries, even in purchasing power terms. It is debatable that that can be described as having a higher living standard.
There is no simple way to compare living standards across countries. Per capita income, especially in purchasing power terms, is arguably the most reliable indicator. However, by focusing just on how many goods and services our income can buy, we miss out a lot of other things that constitute elements of the ‘good life’, such as the amount of quality leisure time, job security, freedom from crime, access to healthcare, social welfare provisions, and so on. While different individuals and countries will definitely have different views on how to weigh these indicators against each other and against income figures, non-income dimensions should not be ignored, if we are to build societies where people genuinely ‘live well’.
Thing 11
Africa is not destined for underdevelopment
What they tell you
Africa is destined for underdevelopment. It has a poor climate, which leads to serious tropical disease problems. It has lousy geography, with many of its countries landlocked and surrounded by countries whose small markets offer limited export opportunities and whose violent conflicts spill into neighbouring countries. It has too many natural resources, which make its people lazy, corrupt and conflict-prone. African nations are ethnically divided, which renders them difficult to manage and more likely to experience violent conflicts. They have poor-quality institutions that do not protect investors well. Their culture is bad – people do not work hard, they do not save and they cannot cooperate with each other. All these structural handicaps explain why, unlike other regions of the world, the continent has failed to grow even after it has implemented significant market liberalization since the 1980s. There is no other way forward for Africa than being propped up by foreign aid.
What they don’t tell you
Africa has not always been stagnant. In the 1960s and 70s, when all the supposed structural impediments to growth were present and often more binding, it actually posted a decent growth performance. Moreover, all the structural handicaps that are supposed to hold back Africa have been present in most of today’s rich countries – poor climate (arctic and tropical), landlockedness, abundant natural resources, ethnic divisions, poor institutions and bad culture. These structural conditions seem to act as impediments to development in Africa only because its countries do not yet have the necessary technologies, institutions and organizational skills to deal with their adverse consequences. The real cause of African stagnation in the last three decades is free-market policies that the continent has been compelled to implement during the period. Unlike history or geography, policies can be changed. Africa is not destined for underdevelopment.
The world according to Sarah Palin . . . or was it The Rescuers?
Sarah Palin, the Republican vice-presidential candidate in the 2008 US election, is reported to have thought that Africa was a country, rather than a continent. A lot of people wondered where she got that idea, but I think I know the answer. It was from the 1977 Disney animation The Rescuers.
The Rescuers is about a group of mice called the Rescue Aid Society going around the world, helping animals in trouble. In one scene, there is an international congress of the society, with mouse delegates from all sorts of countries in their traditional costumes and appropriate accents (if they happen to speak). There is the French mouse in his beret, the German mouse in her sombre blue dress and the Turkish mouse in his fez. And then there is the mouse in his fur hat and beard representing Latvia and the female mouse representing, well, Africa.
Perhaps Disney didn’t literally think that Africa was a country, but allocating one delegate each to a country with 2.2 million people and to a continent of more than 900 million people and nearly sixty countries (the exact number depends on whether you recognize entities such as Somaliland and Western Sahara as countries) tells you something about its view of Africa. Like Disney, many people see Africa as an amorphous mass of countries suffering from the same hot weather, tropical diseases, grinding poverty, civil war and corruption.
While we should be careful not to lump all African countries together, there is no denying that most African countries are very poor – especially if we confine our interest to Sub-Saharan Africa (or ‘black’ Africa), which is really what most people mean when they say Africa. According to the World Bank, the average per capita income of Sub-Saharan Africa was estimated to be $952 in 2007. This is somewhat higher than the $880 of South Asia (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka), but lower than that of any other region of the world.
What is more, many people talk of Africa’s ‘growth tragedy’. Unlike South Asia, whose growth rates have picked up since the 1980s, Africa seems to be suffering from ‘a chronic failure of economic growth’.1 Sub-Saharan Africa’s per capita income today is more or less the same as what it was in 1980. Even more worrying is the fact that this lack of growth seems to be due not mainly to poor policy choices (after all, like many other developing countries, countries in the region have implemented free-market reforms since the 1980s) but mainly to the handicaps handed down to them by nature and history and thus extremely difficult, if not impossible, to change.
The list of supposed ‘structural’ handicaps that are holding Africa back is impressive.
First, there are all those conditions defined by nature – climate, geography and natural resources. Being too close to the equator, it has rampant tropical diseases, such as malaria, which reduce worker productivity and raise healthcare costs. Being landlocked, many African countries find it difficult to integrate into the global economy. They are in ‘bad neighbourhoods’ in the sense that they are surrounded by other poor countries that have small markets (which restrict their trading opportunities) and, frequently, violent conflicts (which often spill over into neighbouring countries). African countries are also supposed to be ‘cursed’ by their abundant natural resources. It is said that resource abundance makes Africans lazy – because they ‘can lie beneath a coconut tree and wait for the coconut to fall’, as a popular expression of this idea goes (although those who say that obviously have not tried it; you risk having your head smashed). ‘Unearned’ resource wealth is also supposed to encourage corruption and violent conflicts over the spoils. The economic successes of resource-poor East Asian countries, such as Japan and Korea, are often cited as cases of ‘reverse resource curse’.
Not just nature but Africa’s history is also supposed to be holding it back. African nations are ethnically too diverse, which causes people to be distrustful of each other and thus makes market transactions costly. It is argued that ethnic diversity may encourage violent conflicts, especially if there are a few equally strong groups (rather than many small groups, which are more difficult to organize). The history of colonialism is thought to have produced low-quality institutions in most African countries, as the colonizers did not want to settle in countries with too many tropical diseases (so there is an interaction between climate and institutions) and thus installed only the minimal institutions needed for resource extraction, rather t
han for the development of the local economy. Some even venture that African culture is bad for economic development – Africans do not work hard, do not plan for the future and cannot cooperate with each other.2
Given all this, Africa’s future prospects seem bleak. For some of these structural handicaps, any solution seems unachievable or unacceptable. If being landlocked, being too close to the equator and sitting in a bad neighbourhood are holding Uganda back, what should it do? Physically moving a country is not an option, so the only feasible answer is colonialism – that is, Uganda should invade, say, Norway, and move all the Norwegians to Uganda. If having too many ethnic groups is bad for development, should Tanzania, which has one of the greatest ethnic diversities in the world, indulge in a spot of ethnic cleansing? If having too many natural resources hampers growth, should the Democratic Republic of Congo try to sell the portions of its land with mineral deposits to, say, Taiwan so that it can pass on the natural resource curse to someone else? What should Mozambique do if its colonial history has left it with bad institutions? Should it invent a time machine and fix that history? If Cameroon has a culture that is bad for economic development, should it start some mass brain-washing programme or put people in some re-education camp, as the Khmer Rouge did in Cambodia?
All of these policy conclusions are either physically impossible (moving a country, inventing a time machine) or politically and morally unacceptable (invasion of another country, ethnic cleansing, re-education camps). Therefore, those who believe in the power of these structural handicaps but find these extreme solutions unacceptable argue that African countries should be put on some kind of permanent ‘disability benefit’ through foreign aid and extra help with international trade (e.g., rich countries lowering their agricultural protection only for African – and other similarly poor and structurally disadvantaged – countries).
23 Things They Don't Tell You about Capitalism Page 12