A long view of income per capita

Per capita income is back in the news again. This piece is not about the reported $233 increase in FY22. It is about a much longer view on income per capita. This is fun and could even be insightful. Not worrying too much about the technical propriety of choosing the specific measure of income per capita, the choice of comparators and the time period makes it fun. Such casual empiricism, however, risks both misreading correlations and mistaking it as causation. So, no guarantees about insights. 

Casual or rigorous, every inquiry begins with a question. Let's re-examine an old one. How has Bangladesh fared on per capita income over the long horizon? The conventional wisdom is Bangladesh has done well. How well, relative to whom and when?

Answers to these questions can be gauged from looking at measures of income per capita across selected comparators over time. Take per capita GDP (measured in current US dollar) and GNI (measured in constant PPP dollars) data across a few selected countries in the middle-income league in South Asia, East Asia, Africa, Latin America, and Europe. The dataset on GDP per capita in current USD covers 1980 to 2019 and GNI in constant (2017) PPP dollars cover 1995 to 2019. 

What can we learn from these data?

The tides lifting all boats

All countries were richer in 2019 than they were in 1980. The rise in nominal incomes was orders of magnitude higher in the first two decades of the 21st century than the last two decades of the 20th irrespective of countries and regions. Real incomes increased in tandem with increases in nominal incomes, particularly in the past two decades until the pandemic. This is evident from comparisons of GNI per capita in constant PPP dollars over time.

East Asian countries, with some exceptions, outperformed all others. Countries in South Asia did better than Africa but fell behind East Asia. Sri Lanka outperformed Indonesia and the rest of South Asia as did Poland in developing Europe. Latin America is hard to generalise because of large heterogeneity in development within the region. Countries like Mexico and Brazil saw cuts in their lead against the East Asian frontrunners while continuing to outshine the South Asian leaders.

These point to the role of tides that lifted all boats despite tsunamis like the global financial crisis and wars in the Middle East. Expansion of international trade in goods, services, and capital due to liberalisation, greater logistical connectivity by land, water and air and technological diffusion pulled incomes up everywhere in varying proportions. 

Trade has been a part of economic development for centuries and more so in an increasingly interconnected world. Emerging economies have seen their share of global trade zoom and become the key driving force behind global trade dynamics in the 2000s. Unfinished goods, components, and services account for 70% of all trade. These happened despite changes in international trading relationships caused by economic, political, and environmental forces.

A story of duality

The Bangladesh story is one of contrast between the glass half full and half empty.

Differences in per capita nominal GDP between Bangladesh and selected comparators over time show we surpassed Pakistan in the first two decades of the new millennium coming from behind in the last two decades in the 20th century. We caught up with India for a while before falling behind again. Sri Lanka moved further ahead from their small initial lead in 1980. We increased our lead on Ethiopia, but Botswana expanded against us many times. China came from behind in 1980 to take a rather indomitable lead by 2019. Vietnam was behind at the dawn of the new millennium but made a remarkable turnaround to move ahead in the past two decades. We managed to expand our lead considerably against Cambodia while falling further behind against Mexico and Brazil.

Comparing nominal differences over time across countries is arguably less problematic in terms of inferring real differences than comparing nominal income levels at a point in time. This is so if inflation and exchange rates moved in the same direction for all countries in the dataset. It is therefore useful to check the above impressions using data that do not require such an assumption.

A broadly similar story emerges when we use GNI per capita in constant (2017) purchasing power parity dollars. Because of data availability constraints both the period covered and the choice of some countries from regions other than South Asia are different. The income differences over time are presented in the table.

Bangladesh surpassed Pakistan and Kenya from behind in 2000 to move ahead by 2019, expanded the lead over Cambodia and almost erased the difference with Nigeria. The differences with Mexico and Brazil were large but did not expand even remotely as much as the differences with China, Malaysia, Vietnam, Sri Lanka, and Poland. In each continent, one can find countries Bangladesh surpassed, countries we kept up with and countries who left us far behind from initially small differences.

These are encouraging as well as humbling. Assessment of Bangladesh's achievements on income per capita based solely on the infamous "basket case" and "test case" benchmarks of the 1970s helps prove the doomsayers wrong. It overlooks what Bangladesh missed but others who were at a similar level of development did not. Bangladesh's development strategy going forward cannot be blind to the game changers that made quite a few countries fast forward their journey on the middle-income path.

The question is not whether the glass is half full or half empty. The question is why the empty part is less empty for some and more for others. Countries in different continents, starting from very similar or even worse initial conditions at different historical junctures, have done much better. The frontier is well above us still.

What is it that those ahead of us did differently?

The game changers

Contextual circumstances differ greatly in the individual states in all regions. Generalising them into contrasting models of development must dig out different initial conditions, cultural traditions, regime types and historical accidents, among others. There is no universal law governing development. But a short list of distinguishing features is worth reckoning as key to the political economy story that goes with it.

Openness to trade and investments, infrastructure, and schooling stand out in distinguishing those who surpassed us. None of them, considered separately, are enough to explain the virtuous cycle of development. For instance, measured by exports plus imports as a percentage of GDP, African countries display openness comparable to European economies and substantially higher than the US, China, and India.

The conjuncture of the three elements compounds into development. Compared to all others in the middle-income league, East Asians are more open to global and regional trade. They were early openers. In merely three decades, several East Asian countries developed extensive and sophisticated infrastructure in power, transport, water, and telecommunications. They have been investing more than 7% of their GDP each year on infrastructure. East Asia is home to seven of the top 10 education systems in the world. They continue to deepen the quality of education, tying learning to new and emerging needs. The development process in Poland and Ukraine shares the same features as prominently as did many western economies and Japan in the 20th century. 

South Asia and Latin America fall short on all three counts. Their trade regimes are much less open, infrastructures weaker and the coverage and quality of schooling deficient. Some Latin American countries such as Mexico and Brazil have done better than most South Asians, but even they are not close to the East Asian leaders.

Catching up

Historical and institutional details matter in explaining the evolution of differences in openness, infrastructure, and schooling between countries and regions. The details on deeper understanding of why some countries do better than others are complex.

Empirical research over the past two decades has established that a substantial proportion of the variation in economic prosperity observed in the world today has its roots in processes of economic development over long periods of time. Since the late 1990s, the view that poor-quality institutions are the root cause of economic problems in developing countries has acquired the status of a "default" working assumption, notwithstanding evidence that institutional reformation is not just a cause but also a consequence of economic development. They interact mutually through processes that may be cyclical or random, implosive or explosive, and stable or unstable with often unpredictable structural breaks.

It is futile to look for silver bullets such as the Washington Consensus or an alternative Beijing Consensus as the recipe for income growth. The key is to focus on tailoring the degree, speed, and sequence of trade, infrastructure, and schooling reforms to the unique contexts of each country.

Illustration: TBS

Zahid Hussain is former lead economist at the World Bank's Dhaka office.